Entrepreneurs’ Relief is a reduced rate of Capital Gains Tax that applies when ones sells certain business assets; or all/part of a business; or more than 5% of shares in a small company in which you work or hold office. It does not apply to non-business assets such as disposal of an investment property.
If you qualify for (and claim) Entrepreneurs’ Relief, you pay Capital Gains Tax at 10% – instead of the normal rate for such assets. Since 6th April 2017, the normal Capital Gains Tax rates for the disposal of business assets have been 10% and 20% (depending on your total taxable income and capital gains). So, although Entrepreneurs’ Relief is still useful, it is less valuable than it used to be.
One of the most common times that taxpayers claimed Entrepreneurs’ Relief was when incorporating a sole-trader business (or partnership) – because Entrepreneurs’ Relief could be claimed on the value of any goodwill transferred. With effect from December 2014, the right to claim Entrepreneurs’ Relief when transferring one’s business to one’s own company was removed.
Another area where Entrepreneurs’ Relief was commonly claimed was when winding up a Company and making a capital distribution to the shareholders. It was the case that if one ceased trading and wound up one’s Company, any cash distributed to the director/shareholders could be treated as Capital (rather than income) and Entrepreneurs’ Relief could be claimed. Now this law has been tightened and if the taxpayer concerned returns to that trade within two years of winding up the original Company, then the cash distributed will be taxed as dividends and subject to income tax/dividend tax rather than Capital Gains Tax. This could mean HMRC going back and taxing the cash at 32.5% rather than the 10% Entrepreneurs’ Relief rate!