Study Zone

Entrepreneurs’ Relief: an update

Sian Beusch explains some important changes to Entrepreneurs’ Relief

Entrepreneurs’ relief (ER) applies to business asset disposals after 5 April 2008 and reduces the effective rate of capital gains tax (CGT) from 18% to 10%. On
6 April this year the lifetime ER limit increased to £2m from £1m. A ‘qualifying business’ is one whose activities consist of trading but other activities that are not substantial are ignored.
Sole traders can claim ER on any disposal of all or part of a business including transfer to a company or when creating a partnership but there is no relief for individual assets before the business ceases or is sold as a whole.
Shareholders may claim ER on shares in a ‘personal company’, one in which they hold at least 5% of the voting and capital rights. The company must meet the ER criteria throughout the year before the shares are sold or the company ceases to trade. ER is available on disposals within three years after cessation.
Partners may claim ER on disposal of all or part of their partnership share.
ER applies to associated disposals by shareholders and partners at the time of or after their qualifying disposals if the asset was used in the business for one year before disposal or cessation.
ER on an associated disposal is restricted if the asset was not used by the business at any time in the asset’s entire period of ownership.
Replacement of Entrepreneurs’ relief
Following the change of government, higher CGT rates and new exemptions for business are to be introduced, most likely on 6 April 2011. The changes mean ER is very important for business owners looking to safeguard their position and mitigate possible future tax increases. Business owners who may be likely to sell in the near future will need to consider their options after the emergency budget.

• Sian Beusch, Technical Associate Director, Baker Tilly Tax and Accounting

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