Entrepreneurs’ Relief is an attractive relief for payers of capital gains tax, when disposing of qualifying business assets, commonly shares in a trading company. Normally this is when the business has been sold or is coming to an end for some other reason, such as retirement. It brings a reduction in the rate of tax payable to 10%, as opposed to the usual rate of up to 28%.
In order to extract the shareholders’ cash, the company is first put into a solvent liquidation (a members’ voluntary liquidation). It makes sense to have paid of all the company’s debts beforehand, including any estimated final liability to HMRC, since interest on those debts will run from the date of commencement of the liquidation.
The Entrepreneurs’ Relief process requires the directors to prepare a statement of the company’s assets and any liabilities and swear a statement that the company will be able to meet its debts, including interest and the costs of the liquidation, within a maximum period of 12 months. This is known as a “declaration of solvency” and must be filed at Companies House.
The next step is for the shareholders to pass a resolution to place the company into liquidation, and appointing a qualified Insolvency Practitioner to act as the Liquidator. The Liquidator will place a formal notice in the London Gazette for any creditors to submit their claims to him, realise the assets and, after paying any remaining creditors and the costs of the liquidation, pass the money over to the shareholders.
There is no reason why there cannot be interim distributions to shareholders along the way, which not only means that the money gets into the hands of shareholders more quickly, but also enable the capital gain to be split over two or more years.
To qualify for Entrepreneurs’ Relief, the assets must be disposed of within three years of the cessation of trade (putting the company into liquidation constitutes a disposal for this purpose).
Originally the relief was for amounts up to £2m, increasing to £5m and, since April 2011, to £10m. However, in recent Budgets, Chancellors have chipped away at the relief to attack what they perceive to be abuses.
The current position is that, in order to claim the relief, the individual must:
Hold a minimum of 5% of both the ordinary share capital and voting rights and, from 29 October 2018, be beneficially entitled to at least 5% of the company’s distributable profits and of the assets available for distribution on a winding up; and
Have held the assets for a minimum of 12 months, or 24 months with effect from 6 April 2019.
The relief is lost if the shareholder becomes involved in a similar trade or activity within two years of the disposal.
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