What is Entrepreneur’s Relief?
Author: Russell SmithNovember 6, 2015
Confused about Entrepreneur’s Relief and its tax benefits? Our tax accountants from Leeds can help!
The taxman isn’t always out to get you. Sometimes, he even helps you out.
Entrepreneur’s relief is a highly valuable tax relief scheme and one every business owner should be aware of. In this blog, our tax accountants from Leeds are going to explain exactly what entrepreneur’s tax is, how to claim it and why it is of benefit to you.
How Does Entrepreneur’s Relief Work?
Entrepreneur’s relief works to reduce capital gains tax.
You pay capital gains tax on anything that you as an individual make a profit from selling. It is similar to corporation tax for limited companies, only it applies to private citizens.
Most people don’t have to worry about capital gains tax. It is payable on profits made from selling items over the value of £6000 excluding homes and cars — unless it is your second house. You also have an annual allowance of £11,100, which means you have to be making profits over that on expensive goods to owe any.
Still, plenty of people do owe capital gains tax, most often the very wealthy or entrepreneurs.
Capital gains tax is marked at 28% — 18% if you are in the basic tax band, although this rarely occurs. This means you pay 28% of your capital earnings in tax.
Remember, capital earnings are paid on profits of sales, not direct sales.
For example, say you sold a second home for £600,000 after paying £500,000. You would pay 28% capital gains tax on that £100,000 profit, excluding your personal allowance.
So, how does this affect entrepreneurs?
Entrepreneurs have a habit of starting or investing in businesses. When they sell up their business, they often make a nice profit and have to pay capital gains on that profit.
The state, however, wanted to reward people for taking the initiative and boosting the economy, creating the entrepreneur’s relief scheme.
What is Entrepreneur’s Relief?
When entrepreneurs sell up their shares in a business, they often have to pay large amounts of tax. This is off-putting, negating a lot of the positive aspects of being an entrepreneur.
To make the idea of being an entrepreneur that invests in and starts businesses more attractive, stimulating the British economy, the government brought in this relief scheme.
Entrepreneurs that sell profitable business assets — such as shares or whole/part of a company — don’t have to pay 28% capital gains tax on their earnings. They must only pay 10%.
Great, right? Yes! But there are some rules to abide by.
How Can I Claim Entrepreneur’s Relief?
Claiming entrepreneur’s relief is easy. You simply notify HMRC of your desire to use the scheme on your self-assessment tax return when recording disposed business assets. However, in order to claim, you must first qualify.
How do you qualify?
- You cannot have already claimed £10 million – The scheme is available to all, up to a lifetime earning of £10 million. After that, you’re paying the standard rate.
- You owned 5% of the business or more – You must be considered either an owner or a valued stakeholder. You must have also had the power to vote and provoke change within the business. This stops small-time investors with no real stake in the business make money and save tax without the added risk.
- You owned the assets for over a year – To claim relief, you must demonstrate you were a part of the business you are selling. You must have been with the company for at least a year.
- You must claim on qualifying business assets – To claim Entrepreneur’s relief, the profitable assets you have recorded must also qualify. Most trading businesses are included in the list of acceptable claims, with the exception of property investment companies.