The New Entrepreneurs Relief UK

The recent Budget provided more details on the new tax relief that will now apply for disposals of businesses and certain shares after 6 April 2008. It's a partial climbdown on the flat 18% rate of capital gains tax that has been introduced, but ignoring the political issues it represents a welcome and important tax relief available to business owners.

How will Entrepreneurs Relief apply?

The relief will apply from 6 April 2008 and will only apply to:

•Gains made on the disposal of all or part of a business (including shares), or

•Gains made on disposals of assets following the cessation of a business

It will operate by ensuring that the first £1 million of gains will be charged to CGT at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.

However before you get too excited this £1 million maximum is a lifetime limit. Therefore if you make a number of capital gains at different times you'll only be able to make claims for relief up to a lifetime total of £1 million.

Any gains in excess of the £1 million limit will be taxed at the normal 18% rate of capital gains tax.

The 4/9 restriction - Entrepreneurs Relief

It's important to note that we're talking about effective tax rates here. There will be no new 10% rate of capital gains tax. It will work by reducing gains liable to CGT (at the single 18 per cent rate) by 4/9ths, resulting in an effective 10 per cent rate (5/9ths × 18 per cent).

Entrepreneurs relief will be given before any capital losses and the annual exemption and will need to be claimed.

Entrepreneurs Relief Example

Mike sells shares in his trading company and realises a gain of £1 million. If this was his only gain the full amount would be reduced by 4/9 (£444,444) and the remaining gain would therefore be around £555,556. Assuming no capital losses and ignoring the annual exemption this would then be taxed at 18% with the CGT being £100,000.

This equates to an effective rate of 10%.

Even if the gains exceed £1 million Entrepreneurs relief will push the effective tax rate down.

If for example a gain of £1.5 million was realised this would be reduced by £444,444, as above. The remaining gain would then be taxed at 18% giving a CGT charge of £190,000. This equates to an effective CGT rate of just 12.6% which is still a highly beneficial tax rate.

Who qualifies? - Entrepreneurs Relief

To start with there's no age limit (which distinguishes it from the old retirement relief). So you could sell a business aged 25 and still benefit from the relief.

Entrepreneurs relief will apply to gains on:

•Disposals of the whole or part of a trading business This includes furnished holiday lettings but does not include a property investment business.

•Disposals of shares (and securities) in a trading company provided that the individual making the disposal has been an officer or employee of the company and owns at least 5 per cent of the shares.

The Revenue will continue to define a trading company in the same way as for taper relief purposes. This means that they'll look at the accounts and activities of a company for the past few years to ascertain whether there are any 'substantial' non trading assets or activities. Substantial for this purpose means at least 20%.