Entrepreneurs Relief – relief for Entrepreneurs?

One of the most significant changes to come from the Budget 2008 was the reform of the Capital Gains Tax (CGT) system. This is the tax paid on profits from the sale (or ‘disposal’ to use the correct jargon) of any assets. This includes businesses, second homes, buy-to-let properties, and any other investments.

Business owners need to pay particular attention to these changes: this seriously affects you! So what are the changes?

1.     A single CGT rate of 18% now applies

Previously, taper relief incentivised business owners and investors to hold investments over the long term. From 6 April 2008, this has been abolished and a flat rate of 18% will be charged on profits from disposals.

The big ‘losers’ from this change are business owners; when coming to sell their businesses, their tax bill is going to be significantly higher. Employees holding shares from save-as-you-earn schemes also dip out.

Those benefiting from the changes will be those holding ‘non-business’ investments, such as second homes, buy-to-let properties, and shares. Previously, they would have paid 24% CGT.

2.     The Annual CGT exemption rises to £9,600

The annual ‘tax-free’ amount before CGT applies has been increased by slightly more than inflation to £9,600. This means that for spouses and civil partners, by splitting investments between them, they can together realise gains of up to £19,200 in the next tax year. Don’t forget, children also have their own CGT exemption.

3.     Entrepreneurs Relief

In the face of considerable industry pressure, the Chancellor has introduced ‘Entrepreneurs Relief’ to soften the CGT blow to business owners.

Entrepreneurs Relief will apply an effective rate of 10% to the first £1m of gains on whole or part disposals of interests held in trading businesses. Gains above this level will be taxed at the 18% rate. The £1m limit is a lifetime allowance, so that it will be possible to make more than one claim.

How do you qualify for Entrepreneurs Relief?
To qualify for Entrepreneurs Relief, there are 3 conditions that have to be met:

i.    The assets have been held for at least one year

ii.   The owner holds at least 5% of the share capital

iii.  The owner is an officer or employee of the company

Entrepreneurs Relief will help many small business owners. Careful planning is necessary to maximise the opportunities and minimise taxation. For example, business owners facing potential ‘one-off’ gains in excess of £1m could actually benefit from reducing the value of their business. Getting an up-to-date, professional valuation of your business is essential.

If you hope to sell your business at some point in the future, now is the time to start planning. Contact Us to raise any questions you have on Entrepreneurs Relief or any of the other CGT changes.