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What assets are eligible for entrepreneur relief?

This means that sole proprietors and partnerships can claim it when selling business assets, just as company directors and other shareholders can claim it when selling shares (and/or business assets).

By cheap accountantPublished 7 months ago 4 min read
Cheap accountants in London

Entrepreneurs' exemption applies to both stock and business assets.

This means that sole proprietors and partnerships can claim it when selling business assets, just as company directors and other shareholders can claim it when selling shares (and/or business assets).

To qualify for company shares, the company must be a trading company or the holding company of a trade group.

Can I apply for entrepreneur's relief?

To qualify for entrepreneurs' aid, you must meet the following requirements.

The two-year qualification period

If you want to qualify for entrepreneurs' relief on the sale of assets, you must meet two standards for a minimum of 24 months:

1. Are you an employee or a lone proprietor?

You must be either a corporate employee (including being a company director) or a lone trader.

2. Do you own at least 5% of the company?

To qualify for entrepreneurs' relief when selling firm shares, you must own at least 5% of the company's share capital.

This must have at least 5% in value (not just number of shares), and you must also have at least 5% in voting rights.

Other Entrepreneurial Relief Rules

A few extra conditions must be met when selling shares or other business assets.

3. Did the company close less than three years ago (or is it still in operation)?

If the company has discontinued operations, it must have done so within three years of the transaction.

You cannot make a claim on the assets of a company that went bankrupt more than three years ago.

4. Are you attempting to sell a 'going concern'?

If you're merely selling a portion of a company, it must be commercially viable and capable of continuing (known as a 'going concern' in accounting parlance). This means you can't simply sell off losing pieces of a company and claim entrepreneur's relief.

5. If the assets include real estate, does the company rent it out?

Property sales are only eligible for entrepreneur's relief if the property is only a business asset (e.g., a shop or warehouse) owned by the company and used rent-free.

If your firm pays rent on the property, or if you are a landlord who holds your portfolio in a company structure, the property is classified as an investment rather than an asset and thus does not qualify for enterpreneur relief.

How much is the relief of entrepreneurs worth?

Using entrepreneurs' relief frequently means paying half the CGT you would otherwise pay when selling shares or business assets.

If your total income for the year (that is, your regular income plus any taxable gains less your personal allowance and CGT allowance) puts you in the higher-rate tax band, you must typically pay higher-rate CGT at 20%.

However, sales of assets eligible for entrepreneurs' relief incur just basic-rate CGT, so you would pay only 10%.

Entrepreneurs' relief can be claimed on assets worth up to £10 million, with everything beyond that amount taxed at 20%.

This implies the relief could save you up to £1 million. Remember that there is a lifetime restriction, so you can never claim more than this.

Can couples qualify for entrepreneur's relief?

If you own a firm with your spouse or civil partner, you can jointly claim entrepreneurs' relief on up to £10 million in assets (possibly saving you £2 million in total).

What you must remember is that both of you must meet all of the eligibility requirements. That is, you must both work in the business and own at least 5% of it, and you must have done so for at least two years.

What are the dangers of claiming entrepreneur's relief?

There are a few mistakes to avoid when selling business assets to avoid accidentally missing out on entrepreneurs' relief.

Selling to a larger corporation

If you're selling your business (or a portion of it) to a larger corporation, be wary if they offer to pay you in stock instead of cash.

If the corporation is substantially larger, your shares may constitute less than 5% of total capital and voting rights. When it comes time to cash in the shares, you will no longer meet the qualifying criteria for entrepreneurs' relief.

Having a minor stake in the business

If your company's share price is extremely near to the 5% lower limit, you'll want to make sure it doesn't fall below that level when you're ready to sell.

Other share allocations may dilute your position, so keep a close eye on your situation.

Other employees exercising their stock options

Again, if your stake is close to 5%, it may go below 5% if other employees exercise their stock options.

Companies can avoid this situation by requiring that options be triggered only on the day of sale, just before the transaction.

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