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Entrepreneurs’ Relief – How Much Tax Is Due On The Sale Of A Business?Written on August 21, 2019 by Kirk Rice LLP

Entrepreneurs’ Relief – How Much Tax Is Due On The Sale Of A Business?

Whether you started your business from scratch or bought it from someone else, when it comes to selling the business on, it is important to understand the tax liabilities that can arise. Entrepreneurs' relief may apply to your business.

The tax position can be different depending on whether your business is operated as a sole trader/partnership or as a Limited company. It is also important to ascertain what is being sold, as each element may be taxed differently. For example, trading premises, fixtures and fittings, trading stock and goodwill.

A key tax relief, which reduces a sellers tax liability, is Entrepreneurs’ relief. Entrepreneurs’ relief reduces the rate of capital gains tax (CGT) to 10% on gains arising from qualifying disposals. From 6 April 2016, the CGT rate applicable for higher rate taxpayers is 20% and for other taxpayers it is 10%, therefore entrepreneurs’ relief is only of benefit to non-higher rate taxpayers if the gain qualifying for entrepreneurs’ relief would cause the basic rate band threshold to be exceeded.

Sole Trader businesses

Generally, the major part of the sale proceeds is in respect of the sale of the goodwill. The sale of goodwill is subject to CGT and potentially entrepreneur’s relief is available so that the effective tax rate is 10%. To qualify for the relief, the individual must have owned the business for at least one year and relief will be available only in respect of relevant business assets. Relevant business assets are all the assets used in the business except those that are held as investments, and any shares or securities, whether or not they are held as investments. The business does not have to be transferred as a going concern, nor do all the assets have to go to the same purchaser.

Limited Company

The sale of shares in a company can also qualify for entrepreneur’s relief for the shareholder although there are conditions. The conditions are;

  • The individual must be an officer or employee of the company
  • The individual holds at least 5% of the shares
  • The company must be a ‘trading’ company
  • The above conditions must have been met for at least two year prior to the date of disposal

Sometimes the buyer does not want to buy the shares from the seller but rather buy the assets and goodwill from the company. This does complicate the tax position for the seller and can create a double tax charge; once, when the company sells the goodwill and a further charge for the owner when he takes the money out of the company. The amount of tax can be mitigated in this circumstance with careful planning.

Do you have a complex tax situation?

Tax planning is a minefield. The rules and regulations are changing constantly. So, unless businesses and individuals are on top of them it can prove costly. This is why many people turn to Kirk Rice. click here to find out more.

Associated disposals

Where there has been a disposal of shares, or a disposal of a partnership interest, and the individual has withdrawn from participating in the business, an associated disposal by the individual of an asset that was used by the business can qualify for entrepreneurs’ relief.

The associated disposal and the withdrawal from the business must happen at approximately the same time. The withdrawal from the business need not be a complete withdrawal: a partner may reduce or a shareholder may retain some shares (but, in the case of a partnership, the partner who is making the associated disposal must dispose of an interest of at least 5% in the partnership, and in the case of shares, the disposal must be of at least 5% of the ordinary share capital, carrying at least 5% of the voting rights). There is also no requirement that the individual should cease to take an active role in either the partnership or company. The asset that is disposed of must have been owned for at least three years (if it was acquired on or after 13 June 2016).

The amount of gain arising on the associated disposal that can be taken into account for entrepreneurs’ relief is restricted when any of the following apply:

  • The asset has only been used by the business for part of the period of ownership by the individual (in which case, the gain taken into account will reflect the period of business use).
  • Only part of the asset has been used for the purposes of the business (so the gain taken into account will reflect the proportion of the asset used for business purposes).
  • The individual concerned has only been involved in the business as a partner of the partnership or as an employee or officer of the company for part of the time during which the asset was used by the business.
  • Any payment of rent was made for the use of the asset by the personal company or partnership, for a period after 5 April 2008.

How to claim Entrepreneurs’ relief

Entrepreneurs’ relief must be claimed.

The claim must be made by the first anniversary of 31 January following the end of the tax year in which the gain arose and may be withdrawn within the same period, although it will normally be made on the tax return for the tax year in which the disposal arose.

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If you are selling your business and need to advice on any aspect of this process call 01344 875 000, 01252 960 500 or 0208 789 8588 or email info@kirkrice.co.uk to speak with one of our financial planners.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.