Among the numerous structural benefits of setting up a company, as opposed to trading as a Sole Trader, there are also some benefits arising from the UK tax system. Entrepreneurs’ relief is the name of one such benefit, designed to encourage the growth of new business and increase the amount of start-ups in the UK economy.
Introduced in the Finance Act 2008, entrepreneurs’ relief helps to cut the tax burden facing certain businesses by reducing Capital Gains Tax. The relief is available on any profit made from the disposal of a section (or the whole) of the business; or from the disposal of business assets. A number of conditions apply of course The original total amount of gains that an individual can claim at the lower rate of tax at 10%, is up to £1 million. However, recent budgets have seen the lifetime limit revised upwards, and the most recent UK allowance set at £10million following the budget in April 2011. These extended measures aim to increase company registration and overall business growth in the country.
The following assets are eligible for relief on their disposal:
- Sales of assets used in the course of business as a complete or partial sale of the company, when trading continues
- Sales of assets used in business within three years of the business cessation
- Sales of personal assets used for business, if the sale is associated with a disposal of interest in the company
- Shares in a personal company
A personal company is simply a company that you have some form of control and involvement in. The term ‘personal company’ is important in determining whether the sale of shares is eligible for entrepreneurs’ relief. For this tax, a company is deemed ‘personal’ to you if you hold 5% or more of the ordinary shares and voting power. This is an important consideration when setting up a company, in relation to the number of shares issued between shareholders.
It is important to note that claims for relief are made by the entrepreneur (through their tax return), not the company itself. In the context of a limited company, this means that an individual who holds shares in the company will be able to claim the tax relief. An individual is allowed to claim as many times as they like, however only to the value of the limits outlined above. In addition, the individual must have owned at least 5% of the shares in the company for twelve months before the sale of assets in order to qualify. Individuals claim entrepreneurs’ relief through their annual tax return.
For more information on Entrepreneurs’ relief, please view the HMRC Helpsheet.
If you have any questions on your tax liability, please book a free consultation with our tax experts following your company formation. To book now, please call our customer support team on 0844 893 0808.
