Entrepreneurs’ Relief

21 Feb

Entrepreneurs’ Relief

Entrepreneurs’ relief is a form of tax relief that could be available for individuals with chargeable gains. It will enable individuals to obtain a rate of tax 10% on certain disposals. We will briefly touch on the conditions for eligibility and the mechanics of entrepreneur’s relief below.


Disposal of the whole or part of a business:

  • Can apply to sole traders and partners.
  • Minimum ownership period of 24 months
  • Relief is only available on relevant business assets

Disposal of assets used in a business which has ceased:

  • Relief is only available on relevant business assets
  • 24 months ownership period
  • Date of cessation is within three years before the date of disposal

Disposal of shares and securities

  • 24 months holding period and employment / directorship required to qualify
  • Company directors / employees selling a material stake in a trading company
  • Must be a trading company
  • The individual selling must hold 5% of the ordinary share capital and can exercise 5% of the voting rights (test 1)
  • The individual must also be ‘beneficially entitled’ to either a) 5% of profits (dividends) and assets available for distribution to equity holders upon winding up of the company (test 2) OR b) 5% of the sale proceeds had the whole of the ordinary share capital of the company been sold on the day of the disposal (test 3)
  • Individuals who sell shares without satisfying these 5% tests (either tests 1 and 2 or tests 1 and 3) will not be eligible for ER.

Associated disposals:

  • Asset owned by an individual which is used in a partnership of which they are partner or by their personal trading company (see tests 2 and 3 above)
  • A material disposal of all or part of the individual’s partnership interest or a disposal of shares in the company.  The disposal must be made as part of the withdrawal from participation in the business of the partnership or the company by the individual.  

How it works:

Relief is obtained by taxing qualifying gains at 10%, regardless of the level of the individual’s income.

The Small Print:

HMRC have imposed some conditions on Entrepreneurs’ relief: There is a lifetime limit which states that each individual may use entrepreneurs’ relief on a maximum of £1m of gains. Rules differ slightly if shares are qualifying Enterprise Management Incentive (EMI) shares. Goodwill is not a relevant business asset for the purposes of entrepreneurs’ relief.

If you have disposed of qualifying shares in an unlisted trading companies whereby you are not an officer or an employee, you may wish to consider obtaining investors relief. Further details can be found here.

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