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Reducing Capital Gains Tax with Entrepreneur’s Relief

Reducing Capital Gains Tax with Entrepreneur’s Relief

In this article, we look at entrepreneurs’ relief which can be claimed by someone selling or disposing of all or part of their business – useful for CII AF1, AF2, AF5, J03, R03 or R06 exam revision.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2019/20.

There have been a couple of amendments to the rules recently, the most recent change coming in the budget, where the lifetime gains were reduced from £10m to £1m, effective from 11 March 2020.

Entrepreneur’s relief effectively allows a person to apply a reduced rate of CGT of 10% on profit made.  It is available to individuals but not to companies, and there are various requirements that have to be met in order to qualify.

Firstly, the business needs to have been owned for 2 years, and during that time, the following should also be met:

  • the individual must have been a sole trader, officer or employee of the company
  • they must have held 5% or more of the share capital of the company and 5% of the voting share capital
  • the lifetime limit must not have been exceeded

Let’s look at an example of how it works using an example from our calculation workbook.

Example

In November 2019, Mr Dawson sold the business he had run as a sole trader since April 1999.  The capital gains on the sale were £250,000 in respect of the goodwill and £315,000 in respect of the business premises and equipment.

Calculate, showing all your workings, his capital gains tax liability. 

From the sale of the business, Mr Dawson received £565,000, worked out as:

Gains Arising : 
Goodwill
250,000
Premises and equipment
315,000
TOTAL GAIN
565,000

From this, he can deduct his annual exempt amount, which is currently £12,000.

This leaves a net gain of £553,000.

This is within the lifetime limit; the gain is taxable at 10%, so £553,000 x 10% = £55,300.

If there had been other gains not qualifying for entrepreneurs’ relief, then the annual exempt amount can be set against them.  If all the gains qualified for the relief, then it is deducted from the gain as shown here.

The claim must be made to HMRC, usually via self-assessment before the first anniversary of the 31 January following the end of the tax year when the disposal takes place.

For a disposal in 2019/20, a claim for entrepreneurs’ relief must be submitted by 31 January 2022.

Taking a look at entrepreneurs’ relief, which can be claimed by someone selling or disposing of all or part of their business. Click To Tweet

 

Grab the resources you need!

If you’re studying for your CII R03 exam, and you don’t want to waste precious time figuring out the calculations, you’ll need to be well prepared. Grab our free taster to try out one of Brand Financial Training’s calculation workbooks for yourself.  Click the link to download the R03 calculation workbook taster now!

Click here to download our free calculation workbook taster for CII R03

Alternatively, you can download a taster for AF1, AF2, AF5, J03 or R06 if you’re revising for any of those exams.