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Beer Mergers Limited is an independent, specialist corporate advisory firm, a "boutique" operation focusing specifically on sales and acquisitions in the small business sector.

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Entrepreneurs Relief

 

Capital Gains Tax (CGT) is a tax levied on the disposal of all assets, including the sale of a business. The tax is payable on the actual gain made from the sale, not the actual sale amount. Entrepreneurs’ relief is a tax relief on CGT that lets you sell all or part of your business and pay only 10 per cent capitals gains tax (CGT) on the profits you’ve made, as opposed to the normal rate of 20%.  

Not unexpectedly, in the very recent Spring Budget there were major changes to Entrepreneurs Relief on Capital Gains charged on the sale of a business.

Principally, the lifetime limit previously set at £10m per entrepreneur, was cut significantly to £1m.

The new lower limit applies to all gains during a persons lifetime, and once the £1m threshold is breached, higher rate taxpayers will pay 20% CGT on any further gains over that limit.

This also took immediate effect as from 11th March, meaning that any sales not completed by that date will now benefit only from the reduced relief.

We could argue for ever on whether this change is right or wrong, but the impetus was mainly for the government to save very significant amounts of tax relief to assist with their spending plans.

The previous relief has also been criticised for several years for disproportionately rewarding a small number of people, and the cut is designed to rebalance that, whilst continuing to offer an incentive for new entrepreneurs and small businesses. 

Otherwise, the tax remains largely unchanged, the principal qualifications being as follows.

Both of the following must apply for at least 2 years up to the date you sell your business:

  • you’re a sole trader or business partner
  • you’ve owned the business for at least 2 years.

Both of the following must also apply for at least 2 years up to the date you sell:

  • you’re an employee or office holder of the company (or one in the same group)
  • the company’s main activities are in trading (not non-trading) – or it’s the holding company of a trading group.

Additionally, for at least 2 years before you sell your shares, the business must be a ‘personal company’, meaning that you have at least 5% of both:

  • the shares
  • voting rights

You must also be entitled to at least 5% of either:

  • profits that are available for distribution and assets on winding up the company
  • disposal proceeds if the company is sold

Finally, the business must be a going concern, in other words commercially trading and viable.

There are many other rules governing Entrepreneurs Relief, some of which are complex depending on individual circumstances, so it is as always essential to seek specialist tax advice as part of planning your sale.

Posted on by Mike Halls

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