Do you want to reduce your capital gains tax (CGT)? Do you qualify for Entrepreneurs Relief? To find out everything you need to know, then please continue reading below.
What is it?
The purpose of Entrepreneurs Relief is to reduce the rate of capital gains tax to a flat rate of 10% on certain qualifying business disposals.
You should be aware that there have been some recent changes to the relief that may affect the tax liability.
Prior to 6 April 2019 the taxpayer would have had to have held the assets for 12 months to the date of disposal. However, the rules have changed and now an individual must hold the shares for 24 months to qualify for relief.
Who does it apply to?
If your business disposal includes a material disposal of business assets, then you will be eligible for Entrepreneur’s Relief.
The disposal of business assets is a disposal of:
- One or more assets consisting of shares or securities of a company
- The whole or part of a business;
- Of or interests in one or more assets in use, at the time at which the business ceases to be carried on, for the purpose of the business.
If you are a shareholder then to be able to claim a disposal of shares, the following conditions need to be met:
- The company must be a trading company or a holding company of a trading group.
- The company in which those shares are held must be individuals’ personal company
- The shareholder must be an employee or officer of the company, or of a company in the same trading group.
If all of these conditions are met for the 24-month period that ends with the disposal of the shares, cessation of the trade, or the company leaving the trading group and not becoming a member of another trading group.
A company is the personal company of the individual at any time when all of the following conditions apply:
- The individual can exercise at least 5% of the voting rights of the company which are associated with ordinary share capital
- The individual holds at least 5% of the ordinary share capital of the company
- The individual is entitled to at least 5% of the profits available for distribution to the equity holders
- The individual would be entitled to at least 5% of the assets available on a winding up of the company
Conditions 3 and 4 have been added for disposals made on and after 29 October 2018. The original legislation that was drafted was altered to include a test to those who would be entitled to at least 5% of the proceeds.
The equity funding share must be made purely just for cash purposes and made for commercial reasons, and not as part of a tax avoidance arrangement.
If the shareholder is entitled to the relief, which would be lost then they can make one or both of the following elections:
- Defer the taxation of the gain made on the deemed sale until the actual disposal of the shares.
- Claim the relief on a deemed sale and reacquisition at market value before the additional shares are issued.
The second election will be required as the taxpayer will make a sale with no sale proceeds, which will pay the CGT due.
If you do not make either of the elections, then the CGT on the gain will not be eligible for entrepreneurs’ relief when it arises.
You should make sure that you are claiming the correct amount of disposal of shares and meet the conditions to be eligible for Entrepreneurs relief.
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