What is entrepreneurs’ relief?
Entrepreneurs’ relief is a lower rate of capital gains tax which may apply when a UK-based business is sold. It was introduced in 2008 to encourage entrepreneurs to invest, grow and eventually sell their businesses. It has therefore been a key feature of the M&A market since that date.
Why is entrepreneurs’ relief important in a transaction context?
Entrepreneurs’ relief is currently set to 10%. This means that those who qualify will pay tax at 10% on all gains on qualifying assets. These might include property, working capital and goodwill. The 10% rate is significantly lower than the standard rate of CGT, giving a real advantage to those who qualify. The basic rules to qualify for the relief are that the shareholder needs to own more than 5% of the equity and also have been an officer of the company for more than 2 years. In this context officer can mean either employee or director.
Compared to the combined rates relating to corporation tax and income/dividend tax, many entrepreneurs feel that this is well worth planning
Whilst the relief applies to the majority of company sales, it is always important to take appropriate tax advice relating to your individual situation.