How to reduce capital gains tax when selling your business.

Business Enterprenuer Relief

When there is a disposal of a business or investment, it is a chargeable event to capital gains tax. The tax is charged on the gain, not the actual amount received.

This rate of capital gains tax can be 10% or 20% depending on if you are a basic or higher rate taxpayer.

Business claiming Entrepreneur’s relief to reduce tax.

This is available where there is a material disposal of the asset by sole traders/ partners. This relief can also be available by selling whole or part of their enterprise. The company director must work in the company and have at least 5% of the shares in the company.

If an individual qualifies for Entrepreneur’s relief, they would pay tax at the rate of 10%. The higher or additional rate taxpayers are those that benefit most from this relief.

Enterprenuer Relief
Reducing capital gains tax by claiming entrepreneur relief

 Conditions for business to qualify for Entrepreneurs relief.

  1. It must be a trading company –This is a company that carries on trading activities which do not include more than 20% of non-trading activities.
  2. The business must have been owned for 1 year prior to the sale.
  3. Associated disposal- This occurs when a taxpayer disposes of a material part of their enterprise. The assets must be used for the purpose of the business e.g. business premises.  This asset, however, must have been used in the business for at least one year. It must have been owned by the individual for 3 years prior to the disposal.

When a business is defined as a trading company.

A  trading company is such that carries on trading activities which do not include to a substantial extent activity other than trading activities. HMRC says “substantial extent” means more than 20% or turnover, asset base or balance sheet, expenses and directors time.

A business claiming Investor’s Relief.

This relief is for investors that do not meet the conditions of being the sole trader or working for the company.

This is a new relief that investors would be able to claim from 2019/20.

Conditions for a business to claim Investor’s relief.

  • The company must be a trading company.
  • The shares acquired must be ordinary shares subscribed for the individual at the cost.
  • The individual must not be a director of the company or employee.
  • The shares must be held for continuously for 3years.

A claim must be made to HMRC on or before the first anniversary of 31 January following the tax year of disposal.

To read more on entrepreneur relief and how to claim

 

The main advice here for any owners that would like to qualify for any of these reliefs is to run their business in a way that the above condition.