Entrepreneurs Relief can be a very useful tax relief when it comes to selling your business. However recent changes have massively reduced the benefit of this relief.
These changes, which were announced in the Budget back in March, have gone a bit under the radar what with everything that has been going on recently.
If you’re a business owner/shareholder who has plans to sell some or all of your business in the near future then you need to understand what’s happened to Entrepreneurs Relief. Also what you need to do to maximise the cash you can still extract from the business tax free.
Entrepreneurs Relief – what’s changed?
When you sell an asset (which is not your main home) for a profit you will usually pay Capital Gains Tax (CGT) on the proceeds. The tax rate can be as high as 28% on profits from property and 20% on other assets including a business.
Entrepreneurs Relief reduces CGT to 10% up to a certain limit.
The relief can be used if you’re self employed as a sole trader or an employee or office holder owning shares (at least 5% of shares and voting rights) in a company. In all cases you must have owned the business/shares for at least 2 years before disposal.
Before the Budget you were able to claim Entrepreneurs Relief on sale profits of up to £10 million.
This has now been drastically reduced to £1 million for any business sold after 11th March 2020.
What’s more. If you have already claimed Entrepreneurs Relief of over £1 million you will not be able to claim it on any future business sales.
So for example, if you owned 100% of the shares in your limited company and you were planning to sell the company for a profit of £5 million. In most cases you will now be paying CGT of 10% on the first £1 million (£100,000) and 20% on the remaining £4 million (£800,000). £900,000 in total. Whereas before the changes were announced your CGT bill would have likely been £500,000. A massive £400,000 difference!
Oh and they have also changed the name of Entrepreneurs Relief to ‘Business Asset Disposal Relief’ just to confuse things!
How to maximise Entrepreneurs Relief
So due to the changes to Entrepreneurs Relief being so huge, now is the time more than ever to plan ahead and ensure you are making use of all the tax planning tools still available to you.
#1 – Gifting shares to your spouse
Gifts to your spouse are exempt from CGT. Therefore if you are planning to sell in the near future you could gift 50% of your company to your spouse and this will enable them to claim their own £1 million Entrepreneurs Relief.
In order to qualify your spouse will need to hold at least 5% of the shares and voting rights (of a limited company) for at least 2 years before the sale and be employed by the company or be an office holder.
#2 – Company pension contributions
Company pension contributions are a great way to get cash out of your company tax efficiently.
Depending on your income, your company could contribute up to £40,000 per annum (the Annual Allowance) to your personal pension. The contribution is a company expense and therefore reduces profit for Corporation Tax. The investment inside the pension then grows tax free.
If you have been a member of a registered pension scheme for the last 3 years you could even go back and use unused Annual Allowance. 3 years, £40,000 per year = a further £120,000 on top of the current year’s Annual Allowance.
Better still, if your spouse is now a shareholder as per point 1 above you could make company pension contributions for them also. Meaning potentially another £160,000 released from the company tax free.
As with any tax planning the devil is in the detail. This is true even more so when it comes to Entrepreneurs Relief. There are a number of qualifying conditions to make sure everything works, so financial advice is essential.
If you would like help getting your affairs in order for a smooth and profitable business sale then please secure a free 15-minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
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