Entrepreneurs’ Relief: What is Business Asset Disposal Relief?

Now officially known as Business Asset Disposal Relief, Entrepreneurs’ Relief is a way for business owners to pay less capital gains tax (CGT) when selling all, or part, of their business.

Read on to find out more about Entrepreneurs’ Relief, including if you are eligible, how to claim it, and what changes were implemented in the 2020 Budget.

What is entrepreneurs’ relief?

Entrepreneurs’ Relief – now called Business Asset Disposal Relief – is a tax break available to individuals selling their businesses, which means they don’t need to pay as much capital gains tax (CGT).

Whenever you sell or dispose of an asset, such as your business or your shares in a company, you will need to pay CGT on any profit, or gain, you make. Entrepreneurs’ Relief reduces the amount of CGT a business needs to pay, from 20% of qualifying profits to 10%.

You will be charged the lower tax rate of 10% on the gains you make up to the lifetime allowance of £1 million. However, if you sold your assets before 11 March 2020, when the most recent changes to entrepreneurs’ relief were implemented, you may be able to claim for more than that limit). Once you have surpassed this limit, you will be charged the usual rate of CGT.

» MORE: What is Capital Gains Tax?

Do I qualify for Entrepreneurs’ Relief?

There are a number of eligibility rules surrounding Business Asset Disposal Relief on top of the £1 million lifetime limit. Typically, you will need to have been a sole trader or business partner for at least two years in order to qualify for the relief. Other eligibility criteria will then depend on what exactly you are disposing of.

Selling all or part of your business

In order to be eligible for Business Asset Disposal Relief when selling all or part of your business, you must:

• have been a sole trader or business partner for at least two years up to the date of the sale
• have owned the business for at least two years up to the date of the sale

These rules mean that if you were to become a partner in a business, you would only qualify for Business Asset Disposal Relief after at least two years in that position.

Closing your business

You can also qualify for Business Asset Disposal Relief when closing your business, rather than selling it. In order to be eligible, you must:

• have been a sole trader or business partner for at least two years up to the date of the sale
• have owned the business for at least two years up to the date of the sale
• dispose of your business assets within three years of the sale

So, just like with selling all or part of your business, there are limits on when you can begin to benefit from Business Asset Disposal Relief in regards to closing a business.

Selling shares or securities

At the most basic level, to qualify for Business Asset Disposal Relief when selling shares or securities, you must:

• be part of a company that has trading as its main activity, or work for a holding company of a trading group
• have been an employee or office holder of the company for at least two years up to the date of the sale

There are then further criteria to qualify for Business Asset Disposal Relief, depending on whether or not your shares are part of an Enterprise Management Incentive (EMI).

EMIs are schemes available for companies with assets worth £30 million or less. It can allow employees to purchase shares options up to the value of £250,000 over three years without needing to pay income tax and National Insurance on those shares.

If your shares are from an EMI, then you need to meet the following two rules:

• You bought the shares after 5 April 2013.
• You were given the option to buy them at least two years before selling them.

If the shares are not from an EMI, then:

• the business must be a ‘personal company’ for at least two years before the sale, meaning you have at least 5% of shares and voting rights
• you must be entitled to at least 5% of either the profits available for distribution and assets if the company is wound up, or the disposal proceeds if it is sold

Due to the different eligibility rules surrounding Business Asset Disposal Relief and Enterprise Management Incentives, make sure you know where your shares are coming from before applying for a tax break.

Selling assets you lent to the business

To be eligible for Business Disposal Asset Relief when selling assets you lent to the business, you must have:

• sold at least 5% of your part of the business partnership, or shares in a personal company
• owned the assets in question, but let the business use them for at least one year up to the date of the aforementioned sale of your part of the business or shares in the personal company, or alternatively the date the business closed

Trustees

It is also possible to qualify for Business Asset Disposal Relief if you are a trustee and are selling assets that have been held in the trust.

How to claim Business Asset Disposal Relief

It is fairly simple to claim entrepreneurs’ relief. If you are eligible for Business Asset Disposal Relief, you can claim it by either:

• including it in your Self Assessment tax return
• filling in Section A of the Business Asset Disposal Relief helpsheet

What if I do not qualify for Entrepreneurs’ Relief?

If you do not qualify for entrepreneurs’ relief, and you are a sole trader or in a business partnership, then you will have to pay capital gains tax at 20% on any gains you make when you dispose of a business asset.

If you are a limited company, meanwhile, you will not qualify for entrepreneurs’ relief. Instead, you will need to pay Corporation Tax on any gains you make from selling or disposing of a business asset.

You can also check to see if you qualify for other forms of tax relief, such as Business Asset Rollover Relief, Incorporation Relief, and Gift Hold-Over Relief.

What were the 2020 Budget changes to Entrepreneurs’ Relief?

Although many groups were campaigning to completely abolish entrepreneurs’ relief back in 2020, the then Chancellor of the Exchequer, Rishi Sunak, did not go that far.

Instead, he reduced the lifetime allowance from £10 million to £1 million.

This means you will only be able to receive relief for the first £1 million of gains; any gains made over this amount will be taxed at the standard capital gains tax rate. This is unless those gains were made on assets sold before 11 March 2020. If that is the case, you should contact HM Revenue & Customs (HMRC) to find out whether you are still eligible for Business Asset Disposal Relief.

So, any gains you make of £1 million or under will be eligible for relief and will be taxed at the lower rate of 10%. Once your gains have exceeded £1 million (whether from one sale or from multiple disposals), you will need to pay the usual rate of CGT, which, for most, would be 20%.

The lower lifetime allowance for entrepreneurs’ relief came into immediate effect for all qualifying disposals made on or after 11 March 2020.

Since then, the scheme has also been renamed, changing from Entrepreneurs’ Relief to Business Asset Disposal Relief on 6 April 2020.