Entrepreneurs relief: selling shares

If you are selling shares in all or part of your business, you might qualify for a Capital Gains tax relief called Entrepreneurs' Relief.

Below, you'll find a short guide providing a quick overview of the essentials - including how Entrepreneurs' Relief works, whether you're eligible for a claim and how you can make a claim. Keep in mind that this is a general guide, and we highly recommend speaking with a self-employed accountant before you make a claim.

Entrepreneurs' Relief is a scheme that reduces the amount of Capital Gains Tax payable when you dispose of (sell) shares in your business. Instead of the usual rates, you pay a reduced tax rate of 10% on the first £10 million of gains. There isn't a limit to the number of times you can claim.

BADR applies to disposals of:

• Shares in a company you own
• A sole trade and its assets
• Joint venture interests
• Partnership interests and assets
• Business assets held by a trust

When is it available?

• BADR is available to CGT disposals made by individuals and trustees and qualifying disposals of business assets
• BADR does NOT apply to disposals by companies, the disposal of investment or non-business assets
  

The limits of BADR

• BADR reduces the rate of Capital Gains Tax (CGT) payable on qualifying disposals to 10%
• BADR can be claimed up to a lifetime limit of qualifying capital gains4

If you qualify for the relief, you will pay a tax rate of 10% on the first £1 million of gains you make. Gains above the first £1 million are taxed at the usual rate.

If you are a higher or additional rate taxpayer, this means that you will be paying about half the usual rate (which is either 20% or 28%). This amounts to tax savings of up to £100,000. 

There is a lifetime allowance of £1 million of gains that can be taxed at the reduced rate. This applies to each individual, and not for each business that is sold.

Example:

Let’s say you decide to close down your contracting business. After settling your liabilities, there’s £100,000 in the company business bank account. And selling off your equipment brings in another £50,000. 

This leaves you with a profit of £150,000. 

Similar to income tax, there is a year tax-free Capital Gains threshold, which currently sits at £12,300. Therefore leaving you with a taxable amount of £137,700. This would ordinarily be taxed at a rate between 18-28% depending on certain criteria (for this example, we will assume the standard 20% Capital Gains Tax).

This would leave you to pay a sizable amount of £27,540.

However, with Business Asset Disposal Relief, you will be required to pay only 10% Capital Gains Tax under BADR rules. This would leave a tax bill of £13,770, creating a saving of £13,770.

At Budget 2020 the Chancellor of the Exchequer announced that the lifetime limit of Entrepreneurs’ Relief would be reduced from £10 million to £1 million for Entrepreneurs’ Relief qualifying disposals made on or after 11 March 2020. At the same time Entrepreneurs'' Relief was renamed to Business Asset Disposal Relief.

The current legislation can be found here HS275 Business Asset Disposal Relief (2021).

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Ordinarily, you can claim Business Asset Disposal Relief if you meet the following conditions:

• you are an employee or office holder of the company, for at least two years before you sell your shares
• the company has been trading for at least two years before you sell your shares
• the business must be a 'personal company' for at least two years before you sell your shares. This means that you need to own at least 5% of both the shares and voting rights. 
• you must be entitled to at least 5% of the company's distributable profits or 5% of the company's net worth at its dissolution
  

If the company ceases trading, you can still qualify for Business Asset Disposal Relief if:

• the conditions above were met for the duration of the 24 month period prior to the company ceasing to trade
• disposals are made within three years after a company ceases trading 
• assets distributed within the company are taxed as capital distribution not as income
  

If the shares are from an Enterprise Management Incentive (EMI), then further conditions apply:

• you must have bought the shares before April 2013
• you must have acquired the option to buy the shares at least a year before selling them
  

The rules surrounding Business Asset Disposal Relief can get complicated, so if there are aspects you are unsure about it is best to consult a qualified accountant.

You can claim the relief on your annual Self Assessment tax return, under the 'Capital Gains Summary' section, or by completing Section A of the Business Asset Disposal Relief helpsheet.

It is also possible to claim Business Asset Disposal Relief on the sale of other assets which are not shares. The rules on this are different and it is best to discuss your individual case with a qualified accountant.

• For the 2021/22 tax year ending 5th April 2022, the deadline is 31st January 2024
• For the 2020/21 tax year ending 5th April 2021, the deadline is 31st January 2023