Entrepreneurs’ Relief (ER)

This is a Capital Gains Tax (CGT) relief which can be claimed on qualifying business disposals by individuals (not companies). It reduces the rate of CGT on the disposal of assets to 10%. There are anti avoidance rules which apply to the repayment of share capital.

ER can be claimed for disposals of  

  • all or part of your business as a sole trader or business partner – including the business’s assets after it closed,
  • shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’),
  • shares you got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013,
  • assets you lent to your business or personal company.

There are anti avoidance restrictions if within two years the individual (or an associate) starts up a similar trade or activity. In these circumstances, the distribution is treated as income.

If you’re selling all or part of your business

Both the following must apply:

  • you’re a sole trader or business partner,
  • you’ve owned the business for at least one year before the date you sell it.

The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.

If you’re selling shares or securities

Both the following must apply for at least one year before you sell your shares:

  • you’re an employee of the company,
  • the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group.

Either of the following must also apply for at least one year before you sell your shares:

  • you have at least 5% of shares and voting rights in the company,
  • you were given the option to buy them at least one year before you’re selling them – if they’re EMI shares.

If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.

If you’re selling assets you lent to the business.

Both the following must apply:

  • you’ve sold at least 5% of your part of a business partnership or your shares in a personal company,
  • you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed.

Maximum ER claim

There is a Lifetime Allowance of £10 million.

Closing a trading company

On closing a trading company, the net asset will be released back to the shareholders. This can be done through an informal striking off or a full liquidation. The Revenue’s notes on this can be found here.

Striking off is very simple and requires the submission of a form (DS01) to Companies House with £10.

Capital distributions on winding up.

From 6 April 2016 there are restrictions on treating the final distribution as capital.

  • The shareholder must have held at least a 5% interest in the company before the winding up.
  • The company has to be a close company.
  • In the following two years, the shareholder must not be involved, directly or indirectly, in a similar trade or activity.
  • The distribution must not be  part of arrangement to avoid tax.

Where the capital distributed following the striking off exceeds £25,000 it is all treated as income. If £25,000 or less the it is deemed to be capital and potentially qualifies for ER.

Where a formal, more expensive, liquidation is arranged all of the distributions are deemed to be capital and potentially qualifies for ER.

Non-trade income.

A company’s trading status is considered by looking at all its activities and circumstances .

Investment businesses, such as property rental businesses are often unlikely to meet HMRC’s conditions.  A company or business is not regarded as trading if it has substantial non-trading activities. HMRC will look at income from non-trading activities, asset held and how they are used, expenses incurred  by employees and the company’s history.

Where investment or non-trading activities are more than about 20% of all activities then a company is “not wholly” trading. Ex-trading premises and rental income may also cause problems.

Cash Surplus on balance sheet and affect on trading status

Where a company has built up a large cash surplus HMRC believe this to be a non trading asset. It is necessary to demonstrate that this is required for working capital. Even if the cash is held passively within a bank account HMRC consider this to be a non trading activity and will seek to deny ER.

Trading company – definition

This is a company carrying on trading activities which does not include ‘to a substantial extent activities other than trading activities.’

Non-trading activities may include investment in property, share portfolios, bonds etc.

Excess cash deposits may point to a non-trading activity. Where cash is being accumulated for future use in the trade then the company will be classed as trading.

HMRC use the phrase ‘substantial extent’ by which they mean more than 20%. They apply the 20% test to:

  • Turnover – does investment income exceed 20% of total turnover?
  • Balance sheet – are more than 20% of the assets of the company held as investments?
  • Expenses – do more than 20% of the expenses relate to non-trading expenses?
  • Directors’ time – do the directors spent more than 20% of the time managing non trading activities.

Cash held on deposit may not involve much ‘activity’ in managing it and this can also indicate trading.

Where the cash surplus arises from the sale of a trade or business assets prior to liquidation then ER can still be claimed but the distributions must be made within 3 years of the sale of the assets. .

HMRC clearance

Companies can use the non-statutory business clearance service (NSBCS) for a ruling on their trading status. Click here for further details.

Useful links

Published 4 October 2017.

Updated 4 April 2018.