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Contents

  1. 1. What is Entrepreneur Relief?
  2. 2. How much Entrepreneur Relief can I save?
  3. 3. How do I know if I’m eligible to claim Entrepreneurs’ Relief?
  4. 4. How to claim Business Asset Disposal Relief
  5. 5. Can couples claim Entrepreneurs’ Relief?
  6. 6. Are there risks in claiming Entrepreneurs’ Relief?
  7. 7. What is investors’ relief?

Entrepreneurs’ Relief: What it is and how to claim it

December 16, 2022
If you’re thinking about selling your business, or even just a portion of your company, then it could pay you to get up to speed with Entrepreneurs’ Relief. Now known as the Business Asset Disposal Relief (or BADR for short), the relief is an HMRC initiative that could help you save money on your Capital Gains Tax payments.

In this article, we’ll explain how the scheme works, the types of qualifying assets and, most importantly, how you can claim entrepreneur tax relief if you’re thinking of selling your business.

What is Entrepreneur Relief?

Entrepreneurs’ Relief – or Business Asset Disposal Relief, as it has been called since April 2020 — is a type of tax break that allows self-employed business owners to sell (or ‘dispose of’) either all or part of a business and pay less Capital Gains Tax (CGT).

How much Entrepreneur Relief can I save?

Whenever you sell or dispose of an asset, such as a business or shares you may have in a company, you’ll need to pay Capital Gains Tax on any profit or gain you make. BADR reduces the rate of Capital Gains Tax a business needs to pay, from 20% to 10% of qualifying profits.The lower tax rate of 10% will be charged on the profits you make up to the lifetime business asset disposal limit of £1 million. This remains the case, regardless of the rate of Income Tax you pay.You can claim Entrepreneurs’ Relief on up to £10 million worth of assets. Everything above this limit will then be taxed at a higher rate of 20%.

How do I know if I’m eligible to claim Entrepreneurs’ Relief?

As well as the lifetime limit of £1 million, there are other eligibility rules around who can claim Business Asset Disposal Relief. This criteria will vary, depending on the type of asset you’re looking to dispose of.

If you’re selling all or part of the business

In order to claim BAD relief, you must:
    Have been a business partner or sole trader for at least 2 years before the date of sale Have owned a business for at least 2 years before the date of sale

If you’re closing a business

You can also claim BADR if you’re closing a business, rather than selling it. In order to qualify, you must:
    Have been a business partner or sole trader for at least 2 years before the date of saleHave owned the business for at least 2 years before the date of saleDispose of your business assets within 3 years of the sale
You can’t claim on assets of business that closed more than 3 years ago.

If you’re selling shares or securities

You may also meet the Business Asset Disposal Relief qualifying conditions if you are selling shares or securities, with the main rules being:
    be part of a company that has trading as its main activity, or work for a holding company of a trading grouphave been an office holder or employee of the company for at least 2 years up to the date of the sale
If the shares are from an Enterprise Management Incentive (EMI), you must have:
    Bought the shares after 5th April 2013Been given the option to buy them at least 2 years before selling them
If not from an EMI, however, for at least 2 years before you sell your shares the business must be a personal company. This means you hold at least 5% of both shares and voting rights.You must also be entitled to 5% of either:
    Profits that are available or distribution and assets on winding up the companyDisposal proceeds if the company is sold
Top tip: As the Business Asset Disposal Relief conditions differ when it comes to shares, it pays to check where any shares and securities you hold come from before applying for a tax break.

Other eligibility criteria for BADR

Your business must be commercially viableAlso known as a ‘going concern’ in accounting speak, this means you cannot sell off loss-making portions in order to claim Entrepreneurs’ Relief.Any property must be an exclusive business assetIf your business asset disposal also includes a property, such as a warehouse or shop, then it can only qualify for tax relief if it is exclusively a business asset, and must be used rent-free.If your company pays rent on a property, or if you are a property landlord with your portfolio held in a company structure, then different rules apply. The property will be classed as investment and not an asset and will therefore not be eligible for Entrepreneur Relief.

How to claim Business Asset Disposal Relief

Making a claim is pretty straightforward. If you meet the eligibility criteria, you can claim by either:
    Including it in your Self Assessment tax return in the supplementary ‘Capital Gains Summary’ section Filling in Section A of the Business Asset Disposal Relief help sheet
There’s no limit to the amount of times you can claim this relief — only that you can claim up to £1million.Claim deadlines apply and you will need to claim Business Asset Disposal Relief by the first anniversary of the 31st January following the tax year of the disposal of shares:
Tax year endClaim deadline
5th April 2021 (2020/21 tax year)31st January 2023
5th April 2022 (2021/22 tax year)31st January 2024

Can couples claim Entrepreneurs’ Relief?

In short, yes. If you jointly own a business with a spouse or civil partner, each of you can claim up to £10 million of assets, saving you a total of up to £2 million.However, the same two-year rule applies as for single claimants and you must also both be employed in the business and each own at least 5%.One spouse cannot use the other’s allowance – you must both qualify.

Are there risks in claiming Entrepreneurs’ Relief?

To avoid accidentally missing out on claiming the business asset disposal relief lifetime allowance, there are a few pitfalls to avoid.

Selling to a bigger company

If you’re selling all or part of your business to a larger company, be careful if they offer shares instead of cash. If the company is much bigger than yours, you could find that your shares fall under the 5% threshold for total capital and voting rights.This would mean you would no longer meet the criteria to qualify for Entrepreneurs’ Relief if you decided to sell.

Having a small share in the company

If your shareholding is close to the lower 5% limit, it could be affected by other share allocations.You should monitor your shareholding regularly if you are considering selling to make sure it doesn’t drop below the 5% threshold eligible for BADR.

Other employees activate their share options

If other employees activate their share options, you could find your total shares dropping below 5%.

What is investors’ relief?

An extension of entrepreneurs’ relief, investors’ relief is for those who aren’t employees or directors of the company issuing the shares. To qualify, you must have no connection with the company.Unlike BADR, there’s no minimum shareholding, so you can also hold less than 5% of shares and still qualify.The scheme has a lifetime limit set at £10m, so can be claimed alongside any BADR you claim, too.You’ll also need to meet the following criteria to claim:
    Shares must be newly issuedYou’ll need to hold the shares for 3 consecutive years before sellingYou must be holding the shares for commercial reasonsShares must not be listed on a recognised stock exchange at the time of issue, although listings on AIM are accepted
Caroline Wire
Caroline WireFreelance Copywriter

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