Definition
Entrepreneurs’ Relief (ER) is a United Kingdom tax relief mechanism introduced on April 6, 2008. This relief allows individuals to pay a reduced rate of Capital Gains Tax (CGT) on qualifying business asset disposals. Typically, standard CGT rates are higher, but ER provides a significant reduction aimed at encouraging entrepreneurship and investment in businesses. Gains are taxed at a rate of 10%—much lower than the conventional rates—with a lifetime limit on the amount of relief one can claim.
Examples
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Selling a Sole Proprietorship: An individual who owns and operates a small business selling handcrafted furniture can claim Entrepreneurs’ Relief when they decide to sell their business. Provided they meet the necessary conditions—such as owning the business for at least two years—they would benefit from a reduced CGT rate.
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Shares in a Personal Company: A director who owns shares in a personal trading company could also utilize ER when selling their shares, assuming they hold at least 5% of the shares and voting rights and have been involved in the business for over a year. The 10% CGT rate would apply to the gain from the sale, reducing the tax burden significantly.
Frequently Asked Questions
1. What qualifies as a ‘business asset’ for Entrepreneurs’ Relief?
Business assets can include interests in a business, shares in a company, and business property. The asset must have been owned for at least two years to qualify for ER.
2. Is there a limit to the relief one can claim?
Yes, there is a lifetime limit on the amount of gains eligible for ER. As of the last update, the lifetime limit stands at £1 million. This means individuals can only apply ER on gains up to this amount over their lifetime.
3. Can both sole traders and company owners claim ER?
Yes, both sole traders selling their businesses and company owners selling shares in qualifying personal trading companies can claim ER, provided they meet the other eligibility criteria.
4. What happens if I exceed the lifetime limit?
If the lifetime limit is exceeded, any further gains will be subject to the standard CGT rates.
5. Are there any planned changes to ER in the future?
Tax policies can change with new government budgets, so it is essential to stay updated with HMRC announcements.
Related Terms
1. Capital Gains Tax (CGT):
A tax on the profit realized from the sale of a non-inventory asset that was greater than the amount realized from the sale.
2. Taper Relief:
A phased reduction of the amount of gain subject to CGT, phased out on April 6, 2008, when ER was introduced.
3. Indexation Allowance:
Used to adjust the cost base of assets for inflation, it was replaced by Entrepreneurs’ Relief.
4. Business Assets:
Assets used in the trade of the business, including property, machinery, and business interests.
5. Disposal:
In the context of CGT, it refers to selling or otherwise transferring ownership of an asset.
Online References
- UK Government - Entrepreneurs’ Relief: Gov.uk ER Guidance
- HM Revenue & Customs: HMRC Guide on CGT
- Investopedia - Capital Gains Tax: Investopedia CGT Guide
Suggested Books for Further Studies
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“Taxation of Small Businesses” by Malcolm James A detailed guide on various tax reliefs available for small businesses in the UK, including Entrepreneurs’ Relief.
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“Entrepreneurial Finance” by Philip J. Adelman and Alan M. Marks Covers the financial aspects and tax planning strategies for entrepreneurs, providing in-depth insights into reliefs like ER.
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“Capital Gains Tax 2020/21” by Rebecca Cave A comprehensive look into the CGT system in the UK, detailing Entrepreneurs’ Relief and other relevant reliefs.
Accounting Basics: “Entrepreneurs’ Relief” Fundamentals Quiz
Thank you for engaging with our detailed exploration of Entrepreneurs’ Relief. This knowledge not only equips you with the technicalities of tax reliefs but also hones your understanding of entrepreneurial incentives. Happy learning!
