Entrepreneurs’ relief reduces the amount of capital gains tax (CGT) that is payable on the sale of all or part of a business, the assets of the business after the business has ceased or the shares in the company. Gains that qualify for the relief are taxed at 10%, rather than the usual CGT rates of 18% and 28%. As most entrepreneurs will pay tax at the higher rate of CGT of 28%, this represents a saving of 18%.
How Much Can I Claim?
The amount of relief available to any one individual is capped at a lifetime limit. This has been increased considerably since the start of the current tax year, rising from £1 million to £2 million from 6 April 2010, and again to £5 million from 23 June 2010. The current limit of £5 million means that claiming entrepreneurs’ relief can potentially save a higher rate taxpayer £900,000 in CGT – a saving most taxpayers will doubtless deem worthwhile!
The mechanism for giving relief also changed from 23 June 2010. Prior to 23 June, gains qualifying for relief were reduced by 4/9th and taxed at the then CGT rate of 18% (giving an effective tax rate of 18%). From 23 June, eligible gains are simply taxed at 10%.
Although it is not possible to apply the increased limit to gains arising before 23 June 2010 that did not attract relief by virtue of the lifetime limit being exceeded, gains made after 23 June can still qualify if total gains on which relief have been given do not exceed the limit at the time that the gain is made.
Joanna sells a business on 1 May 2010, realising a gain of £4 million. She sells a further business on 1 August 2010, realising a gain of £1.5 million. She has made no other disposals qualifying for entrepreneurs’ relief. She also makes other gains in 2010/11 which utilise her annual exempt amount.
The first disposal in 2010/11 (on 1 May) is when the lifetime limit is £2 million. The gain of £4 million is in excess of this. £2 million of gains qualify for relief. The CGT payable in respect of this disposal is as follows:
Less: Entrepreneurs’ relief (£2,000,000 x 4/9) (888,889)
Chargeable gain 3,111,111
Capital gains tax @ 18% 560,000
By the time Joanna makes the second disposal, the lifetime limit has increased to £5 million. She has used up £2 million of her lifetime limit on the earlier disposal, allowing he to make a further £3m gains which qualify for relief. The gain on the second disposal of £1.5 million is less than the unused amount so qualifies in full for entrepreneurs’ relief. The gain is taxed at 10%, making the CGT payable by Joanna on the second disposal £150,000.
She has £1.5 million of her lifetime limit still available for use against any future disposals. She cannot carry this back to set against the gain of £2 million in excess of the previous lifetime limit on the 1 May 2010 disposal. It does not matter that the disposal both took place in 2010/11. What is important is the lifetime limit at the date of the disposal.
The limits apply per individual, not per business. This allows planning opportunities to maximise relief. For example, a husband and wife company can realise gains of £10 million and only pay tax at 10% on those gains. However, the qualifying conditions must be met by each individual for relief to be given. Also the relief must be claimed as it is not given automatically.
Further details on the conditions and the relief can be found in Tax Return Helpsheet 275, which is available on the HMRC website at www.hmrc.gov.uk/helpsheets/hs275.pdf.
By Sarah Bradford