What is Entrepreneurs Relief ?
Updated: 2 days ago
Entrepreneurs Relief (ER) is a UK government tax relief that can cut the amount of corporation tax you pay by up to £300,000 per year.
As an entrepreneur, you are eligible to claim ER if you meet the following criteria: you’re self-employed; or own at least 25% of your company as an individual or through your personal company (shareholder); and your company has less than £200,000 in total assets before applying for ER.
What is the Entrepreneur's Relief?
Entrepreneur's relief is a way of paying less Capital Gains Tax when selling an asset. In general, if you hold an asset for 12 months or more, it will be liable to CGT at 10% (or 20% in some cases) on any gains that you make.
But Entrepreneur's Relief provides an exemption from CGT if, at some point within those 12 months, you started trading as a business. What counts as starting a business isn't really defined but it's generally accepted that doing something commercially – even just once – means that you're trading.
How Does It Work?
The Startup Costs Relief is a business relief that is available to all eligible startups. The relief aims to reduce startup costs of entrepreneurs and small businesses who may not have much money, but have big ideas.
To qualify for Startup Costs Relief, you must be starting a new business in any of these sectors: Information Technology; Financial Services; Life Sciences; and Environmental Technologies.
The relief also includes some costs associated with your home office if it is used as an integral part of your business.
If you are unsure if your business qualifies, call HMRC's Entrepreneur's Helpline on 0300 456 3565.
Who Benefits From The Capital Gains Tax Cut?
For many businesses and entrepreneurs, taking advantage of Entrepreneurs’ Relief is an essential way to protect their assets from high capital gains tax rates.
What does that mean? Simply put, it means that you can benefit from an exemption for capital gains if you sell or transfer assets to your business and have already used them privately.
Let’s look at a practical example: Say you buy some software for use in your business back in 2015 when it was worth £1,000 and then realise a taxable gain of £200 when you sell it off again in 2016; under Entrepreneurs’ Relief, if all of those qualifying conditions are met then your gains would be cut down to just £50.
When Can I Claim The Relief?
The relief is available to qualifying businesses, which are defined as sole traders, partnerships and companies in which at least 50% of voting rights are owned by a single individual. To qualify for Entrepreneurs’ Relief you must be self-employed on 31 December 2017.
However, you can claim any loss carried forward from previous years that are still available to offset against income arising in 2017/18 (provided these losses arise after 6 April 2016).
That means there is a three year carry back period covering losses incurred up until 31 December 2015. Losses carried forward from earlier years will be lost if they are not used within three years of being incurred.
What Type Of Business Income Is Eligible For The Relief?
There are two types of business income that qualify for Entrepreneurs’ Relief: trading income and property income.
If you receive either type of income, your taxable profits are firstly reduced by £1m.
This relief only applies to taxable profits so if a company is loss-making, there’s no relief available under EIS. The £1m figure is indexed annually in line with inflation.
How Much Capital Gains Tax Will I Pay?
As a general rule, if you owned at least 10% of your company and were actively involved in its management and control, capital gains tax may be relieved.
Alternatively, if you’re engaged in business as a partner, all of your share of income (and therefore gains) are automatically eligible for relief.
Essentially, entrepreneurs relief is a special tax regime aimed at small-business owners. In order to qualify for it: You must have more than one business interest (e.g., not just an individual trade); you must use any proceeds from disposals to reinvest in another qualifying business; and there are limits on how much cash can be involved in those reinvestments.
Some Common Questions Answered About Entrepreneurs' Relief
What if I am a partner in a partnership, but my personal assets are worth less than £50,000. Am I still entitled to relief on assets owned by my business partner or spouse who also holds equity in my business? How do self-employed and employed people apply for relief under entrepreneurs' relief?
If you're employed and take shares as an employee or director of your company then you should use Form SS164. If you're self-employed and taking shares as an employee or director of your company then you should use Form SS165.
What is Entrepreneurs Relief - The Bottom Line
Entrepreneurs’ relief allows business owners to offset a money made on shares in an unquoted trading company or qualifying interest against their other income.
This is known as Entrepreneurs’ Relief (ER) – and it effectively lowers your capital gains tax by 10%. For those who want to invest in private companies, ER is great news.
But there are many conditions that must be met before claiming ER and HMRC has some strict rules about what counts as ‘relief.’ So make sure you understand all about entrepreneurs relief if you think it could help you.