What is Entrepreneurs Relief? Tax Relief Explained

In the event that the assets or shares of a company have been sold off or liquidated, a subsequent tax is placed on any profits accrued therein, of which is primarily payable to the governing body. This taxable percentage can vary depending on the amount, value, and nature of the liquidated assets.

However, certain caveats exist that allow an individual to retain more of their profits and reduce the total percentage of tax that is placed on the assets and shares, one among which is referred to as entrepreneurs relief.

Entrepreneurs relief, in short terms, is a form of tax relief geared towards proprietors, directors or shareholders of a company as it is being liquidated or sold off in some manner, wherein the capital gains tax involved in said liquidations and sales are reduced significantly – up to fifty percent, in fact.

What is Capital Gains?

The term capital gains refers to the difference between an asset’s initial value and that of its relative value once it has been liquidated or otherwise sold – oftentimes simply being referred to as “gains”.

In terms of company asset liquidation and selling, this can equate to the shares of a company being valued significantly higher than they were initially found to be due to the company growing or similar circumstances.

A similar circumstance can be found in the fact that the assets of a liquidated company or that of a company selling their assets have also gained in value as time passes, of which is subject to capital gains tax in the event that they are sold off.

What is Capital Gains Tax?

capital gains tax

By extension of the concept of capital gains is capital gains tax – a levy placed on any subsequent profits accrued from the liquidation or selling of company assets and stocks, especially in the case of a dissolved or otherwise winded up company.

At the current time, the ordinary rate of capital gains tax is thirty-three percent, of which may be lowered through the use of entrepreneurs relief or other forms of tax relief related to the liquidation or disposal of a company and its underlying assets.

Why does Entrepreneurs Relief Exist?

In the UK, entrepreneurs relief has in fact been replaced with a similar but more effective bill therein dubbed “business asset disposal relief”, wherein it serves much the same function of reducing the capital gains tax incurred from disposing of business assets down to a much smaller ten percent.

However, despite this, the original purpose of entrepreneurs relief still lives on in its successor tax break, wherein directors and shareholders being placed at a disadvantage due to the liquidation or dissolution of their company and its assets can receive a larger sum of money from said liquidation.

There are limits to entrepreneurs relief, however, as it is not a catch-all tax break, and can only apply to certain assets and certain companies that fall into the described criteria.

What Company Assets Qualify for Entrepreneurs Relief?

In order for a particular asset to qualify for the reduced capital gains tax that is under the purview of entrepreneurs relief and its replacement tax break, several criteria must be met by said asset and its company at the time of its disposal or liquidation.

The largest and most obvious among these is the fact that the asset must be owned beneath a trading company – as well as also in the ownership of a sole trader who is utilizing said asset in a trade.

In terms of shares of a company qualifying for entrepreneurs relief, said shares must be held by a sole trader who is in the employ or related in some way to the trading company that is being liquidated or is selling their shares.

How Does a Company Qualify for Entrepreneurs Relief?

Much like how an asset or company share must meet certain criteria in order to qualify for the tax reduction benefit of entrepreneurs relief, the company being traded or liquidated must also fit the criteria for reduced capital gains tax.

The first of these criteria is the need for the company to actually retain ownership of assets, securities or other forms of financial implements and inventory that may undergo the process of liquidation.

Apart from the obvious need for actual assets and shares, the company must also have been in existence for longer than three years, as a requirement for individuals qualifying for entrepreneurs relief is the direct ownership of a share or asset for a continuous period of three years at a minimum.

However, certain characteristics of a business can do quite the opposite – and preclude the company from qualifying for the tax breaks imparted by entrepreneurs relief.

These are that of a company in possession of securities or other forms of investments, as well as company ownership of development land or letting land, all of which will require more complex motions and caveats to be addressed instead of entrepreneurs relief.

Who Qualifies for Entrepreneurs Relief?

In order for the designated recipient to qualify for the reduced capital gains tax of entrepreneurs relief, they must retain ownership of whatever asset that is being disposed of or liquidated for a period of three years at a minimum.

This is in tandem with the requirement that the business asset be used or employed beneath a qualifying company – a set of criteria mentioned in the previous section of this article.

If the particular financial implement being sold off is that of company shares, the individual must have retained a minimum of five percent ownership of said stock pool being sold for a minimum of three years, much like that of qualifying assets.

How is Entrepreneurs Relief Calculated?

Apart from the life-time limit of one million euros that may be deducted as a tax break from capital gains tax, a flat ten percent tax rate is applied to any money made from the disposal or liquidation of company assets and shares.

This tax rate, otherwise known as capital gains tax or CGT, is not applied to the entire value of the asset or share being sold, but instead the difference between its original paid value at the time of purchase and that of its liquid value at the time of selling.

As such, an asset qualifying beneath entrepreneurs relief that was originally purchased for two-hundred euros and sold for three-hundred euros will only have a tax cost of ten euros, for example.

Even in the event that the asset is sold for less than it was purchased for or that no due taxes are applicable in the sale of said asset, a tax return must still be filed for the purposes of record keeping and verification.

Does Entrepreneurs Relief Apply to Insolvent Company Liquidation?

Though now known as BADR or business asset disposal relief, entrepreneurs relief does apply to profits made from the liquidation of a company’s assets and shares – though with certain caveats that must be accounted for in the event that an insolvent company wishes to file for a capital gains tax break.

Among these is that the liquidation of said company must be of a voluntary nature, such as in the case of a member’s voluntary liquidation instead of a compulsory liquidation as would be imposed by the companies house or a court order.

As such, by the very nature of this particular rule, insolvent companies not undergoing voluntary liquidation are automatically disqualified from the benefits of entrepreneurs relief.

This may be avoided through the usage of a CVA or company voluntary arrangement, either with creditors or in a court of law.

References

1. Unknown Author. (N.D.) “Business Asset Disposal Relief” UK Government. Retrieved on February 9 2022 from (https://www.gov.uk/business-asset-disposal-relief)

2. Jason Fernando, Lea D. Uradu, Timothy Li. (January 20 2022) “Capital Gains Tax” Investopedia Tax Laws and Regulations. Retrieved on February 9 2022 from (https://www.investopedia.com/terms/c/capital_gains_tax.asp)

3. Gennaro A. Insolvency Risk and Value Maximization: A Convergence between Financial Management and Risk Management. Risks. 2021; 9(6):105. https://doi.org/10.3390/risks9060105

4. Michael J. Buckle, John L. Thompson. (1995) “The UK Financial System: Theory and Practice” Manchester University Press ISBN 0719048168, 9780719048166