PLEASE NOTE: Entrepreneurs Relief changed on 11th March 2020. Please see updated information via our latest blog.
When you sell a business, you want to walk away with the satisfaction that you’ve achieved your professional goals, made an impact on your peers and customers, and left a legacy through the quality of the products or services you’ve developed. You also want to move on to the next stage of your life or career with the maximum monetary sum possible.
Selling a business is a complex process and our goal as a corporate finance company in London is to help you, the business owner, navigate this. There are a multitude of financial aspects to consider and one of these is your obligations as a tax payer. We often get queries from business owners about Entrepreneurs Relief, which can be a confusing area for many – not least at a time when the economic landscape is changing more than ever.
What is Entrepreneurs Relief?
First introduced in 2008, Entrepreneurs’ Relief allows tax of just 10% to be paid on a lifetime allowance of £10,000,000 when a business (or part of it) is sold off. For a business to be eligible, a shareholder must have a 5% or more shareholding, and have been involved for a year or more with a company as an employee or director.
Let’s say your taxable proceeds were £5m and you took them out as a director through dividends using the current tax rates, you’d be paying approximately £1.9m in tax. Whereas, if you qualified for Entrepreneurs’ Relief, you would pay only £500k in tax at the reduced rate of 10%. This benefit could allow you to minimise tax and maximise the overall value you achieve when selling your business.
Even if you’re not technically ‘selling’ your business, but rather gifting it to a successor or going into liquidation, Entrepreneurs’ Relief can still be applied. Whether you’re a sole trader or business partner, the sale of all or part of your business could qualify for the relief. The assets of the business and any company shares in which the seller owns at least 5% of the shares (including voting rights) both count.
In addition, you could be eligible if shares were acquired through an Enterprise Management Incentive scheme established after 5 April 2013, or if assets were lent to the business by the seller.
At the time of writing, sole traders or business partners must have owned the business for at least a year in order for the sale to qualify, and the seller of shares must have been an employee, director or holder of office within the company. However, this will change in 2019.
It’s important to be aware that Entrepreneurs’ Relief does have limits. Your company must be trading at the time you apply for the benefit and shares must be sold within three years of the date you cease trading. Another important detail of the qualifying criteria is that you must not be pursuing other activities to any “substantial” extent. St James Place says that HMRC defines “substantial” as “greater than 20% by reference to a reasonable measure in the circumstances of the case”.
Involved in property and letting? Unfortunately, these industries are disqualified because they are seen as investment operations rather than trades.
A recent article by Money Marketing explains the stricter conditions for Entrepreneurs’ Relief that are coming into force in 2019. To ensure it’s going to genuine entrepreneurs, the government will extend the minimum qualifying period from 12 months to two years.
Costing documents now released show the government expects to generate an additional £5m in tax revenue from 2019/20 through the measure, rising to £10m in 2020/21 and £90m by 2023/24.
Always seek expert advice
The levels and bases of taxation and reliefs from taxation can change at any time and the value of any tax relief depends on your individual circumstances. While Entrepreneurs’ Relief offers potential benefits when selling your business, it is part of a much bigger picture that demands a skilled understanding of recent legislation and many other variables, so you’re well-advised to seek professional help before beginning any business sale process.
Entrepreneurs Hub is an approachable corporate finance company helping businesses in London and across the UK to sell their business – the smart way. Contact us in confidence to find out more.