What Is Entrepreneurs' Relief (ER)?

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In simple terms, Entrepreneurs' Relief (ER) is a relief from Capital Gains Tax (CGT) when an individual sells or disposes of all or part of their trading business.

It applies to a lifetime limit of £10 million of qualifying capital gains (after deduction of any related losses) in respect of which an individual or a trustee makes a claim and reduces the rate of tax applicable to that gain to 10%.

To claim ER, a number of conditions must be satisfied throughout a qualifying period and the qualifying conditions depend on the type of disposal.

Qualifying Conditions

Historically, an individual must have been an office holder or employee of an incorporated company who held at least 5% of the ordinary share capital and was able to exercise at least 5% of the voting rights throughout the period of one year before the disposal to qualify for ER.

The same conditions apply if the company has ceased trading. Disposal of the business' assets must occur within three years to qualify for ER.

Expanded Legislation

For disposals occurring on or after 29 October 2018 to qualify for ER, an individual's shares (together with the qualifying conditions above) must also give the right to either of the following:

  • 5% of distributable profits or 5% of the company's assets available to equity holders on a winding up; or
  • A proceeds test which requires the individual, in the event of a disposal of the whole of the ordinary share capital of the company, to be beneficially entitled to at least 5% of the proceeds.

Furthermore, for disposals that occur after 6 April 2019, the qualifying period within which the conditions must be met has increased from one year to two years.

Contact our Commercial Law Solicitors

If you are planning on selling your business or would like to find out more about what Entrepreneurs' Relief could mean for you, get in touch with our specialist commercial law solicitors. Contact our team by telephone on 0330 123 1229, complete our contact form or send us an email via info@smithpartnership.co.uk.

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