Everything you need to know about ER - Entrepreneurs’ Relief
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Everything you need to know about ER – Entrepreneurs’ Relief

Entrepreneurs’ Relief ? When one decides to become an entrepreneur, there are several processes and hurdles one has to go through. Starting a new business is no cakewalk. There are many challenges that a business person faces at the beginning of a new start-up company. Many entrepreneurs work hard and flourish their businesses gradually, while the same doesn’t happen with a section of other business owners. There could be many reasons that play a role as to why the business couldn’t take off as expected. There comes a time when unsuccessful business owners think about restructuring the business, selling it or giving away some assets. This is where Entrepreneurs’ Relief (ER) pops to the fore.

What is the Entrepreneurs’ Relief (ER)?

ER is a relief against Capital Gains Tax accessible to UK entrepreneurs who sell their businesses under specified conditions. Entrepreneurs’ relief is available for up to the first £10,000,000 of lifetime capital gains. It’s called Entrepreneurs’ Relief (ER) for a reason – the UK individuals could gain tax relief at a reduced rate of 10%.

Gains exceeding £10 million lifetime limit would attract the standard rate of capital gain tax.

ER was introduced as the descendant of Business Asser Taper Relief to reward entrepreneurs for the risks taken while establishing or investing in a business.

How do you qualify for Entrepreneurs’ relief?

To qualify for ER – see to it that you fulfil all of the following conditions.

  • You have owned the shares in your limited company for a minimum of two years before the date you sell it.
  • You have owned a minimum of 5% of the shares and voting rights before the two years span.
  • You must be entitled to at least 5% of either:
  1. Profits available for distribution and assets on abolishing the company

Or

2. Disposal proceeds if the business is sold

  • You are either an employee or office holder of the company (or one in the parent group)
  • The firm’s main activities are in trading (instead of non-trading activities like investments) – or it’s the holding company of the trading group.

Let’s further understand it with an example.

IF you wind up a company with £100,000 of reserves,

  • The gain would be £99,999 as the initial share value is £1 on the company’s entrance.
  • Each shareholder would be qualified for their annual CGT allowance, which is currently £12,000 for the economic year 2019/20
  • The remainder of the gain would be charged to 10% tax, which is payable by the individual taxpayer.

Easy Tax and Accounts’ is there to help you explain the whole ER process and claim it hassle-free.

Quick notes:

The qualifying criterion is seemingly tightened. The changes in ER policies are envisioned and enforced to seize the business owners from gaining the unintended tax advantages. Especially for instance where –

One business gets shut down, the assets are distributed at the reduced tax rate, which is 10% under Entrepreneurs’ Relief, then an extensively similar business gets established shortly afterwards.

If you are going back into contracting within two years, particularly in the same trade, then acquaint yourself with this rule.

Can I claim even if my company stops trading?

If the company shuts down and stops being a trading company, you can still be authorised to avail relief if you sell the shares within three years.

How to claim the relief?

On your Self Assessment Tax Return, you can make a claim on the Capital Gain Supplementary pages.

For an asset sold in the 2018/19 year, then 31st January 2021 will be the deadline for claiming ER.

The bottom line

Did you find it helpful?

We have attempted to provide you with an outline of ER and general information associated with it. For further consultation, please get in touch with us. Our tax advisors and qualified accountants would be happy to provide service and advice.

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