Selling a company in the UK can bring a double relief to its owner: from all the operational stress and from taxes. And if with the former the pleasure is yours, the latter is ensured by British tax laws. Entrepreneurs’ Relief (ER) allows you to pay less capital gains tax (CGT) when you sell or give away your company.
Using ER might be a smart move for those unhappy with where their startup is going but yet unwilling to give up on their entrepreneurial career. The good news is that ER can save some money and also bring enough funds to start a new business from scratch.
I want to sell my business. What taxes will I have to pay?
If you are UK resident selling or disposing of the assets with a profit, you must pay capital gains tax (CGT). What’s subject to taxation is the positive margin, not the actual amount of money you’ve sold your assets for.
CGT is imposed on UK residents. Non-residents are not subject to capital gains tax in the UK even if the assets are in the country, except for the cases when the assets are used in trading.
Individuals with an average personal income are charged at a 10% rate, the ones with higher personal income — with a respective higher rate of 20%.
However, if you’re eligible for Entrepreneurs’ Relief, your CGT rate can be reduced.
Entrepreneurs’ Relief (ER) is both for those selling all the business and those who dispose of only a part of it.
What makes me eligible to claim Entrepreneurs’ Relief?
- You are a UK resident. Non-residents are not subject to capital gains tax in the UK even if the assets are in the country, except for the cases when the assets are used in trading.
- You are selling or disposing of the whole business, business assets or shares. “Disposing of assets” means you are closing the company, giving away your business or assets as a gift, swapping them for other assets, etc.
- You have owned that business or asset for at least 2 years before the sale or disposal. If you’re shutting your business down, it’s at least 3 years.
- Your company operates in trading or at least it’s a holding company and one of its assets is involved in trading. There is no legal definition of trading. It is easier to say what non-trading is. If your company is involved in property development, investments or licencing arrangements, you won’t be eligible to claim the relief. If most of your company’s income comes from non-trading activities (such as rental income), it won’t qualify for the relief either.
According to HMRC, a company can be called a trading one if no more than 20% of turnover comes from investments, no more than 20% of assets on the balance are non-trading assets and no more than 20% of management time is spent on non-trading activities. If the company stops working in trading, you have 3 years to apply for the tax relief provided that you dispose of your shares within the said period of time).
If you are selling shares or securities
- You should hold at least 5% of both the shares and the voting rights.
- Your shares/securities must entitle you to at least 5% of the company's distributable profits and assets when the company is wound up. If you hold less than 5%, there is still a chance you can apply for Entrepreneurs’ Relief – the specific cases are described on the UK Government page devoted to the matter.
- You should have been an employee or an officeholder for no less than 2 years before the sale or disposal. Officeholders are the people appointed to positions at the company but having no employment contract. You're an officeholder if you are a registered company director or secretary, board member of statutory bodies etc. If you got your shares through an Employee Management Incentive programs, consult with the website of the UK Government on other rules that might apply.
How can I calculate Entrepreneurs’ Relief?
- Sum up all the gains from selling the qualifying assets.
- Deduct all the qualifying losses. You have a capital loss if you sell an asset cheaper than you had purchased it.
- Deduct your tax-free allowance (for CGT it’s £12,000 in 2019/2020 tax year).
- The remainder is the tax base amount to pay at a reduced rate.
How can I claim my Entrepreneurs’ Relief?
- Through a Self-Assessment Tax Return. It is a system that HMRC uses to collect capital gains tax. You can submit the return online or send them a paper form.
- Through the Section A of the Entrepreneurs’ Relief help sheet. You can download the form from the official website.
Is there a limit to claim my Entrepreneurs’ Relief?
You can claim the tax relief as many times as you want. But you can collect only up to £10 million during your lifetime.
It means if you have already received, for example, £7 million as a tax relief after selling or disposing of your business, next time you can claim no more than £3 million even if the actual amount eligible for the tax relief is considerably bigger. If your qualifying capital gains are more than £10 million, you cannot get any more relief and will be charged at the standard CGT rate.
When should I claim my Entrepreneurs’ Relief?
The deadline for claiming Entrepreneurs’ Relief is a year starting from January 31 following the tax year in which the business was sold.
|Tax year ended||Deadline to claim|
|April 5, 2020 (2019-2020 tax year)||January 31, 2022|
|April 5, 2019 (2018-2019 tax year)||January 31, 2021|
|April 5, 2018 (2017-2018 tax year)||January 31, 2020|