With recent changes in the budget announced by Alistair Darling, the government have made it clear that their intention is to support small and medium enterprise (SME) as well as start up companies in general. According to the research, SME’s account for 99.9% of the businesses within the UK and employ a large section of the workforce. So supporting them and encouraging growth goes hand in hand with helping the economy out of the recession.
This is good news for entrepreneurs looking to start their own business (see our article on the The 2010 Budget – Point of interest for SME’s and Start-ups) but it is also good news for those SME’s already thriving within the UK. One such piece of good news comes in with changes to the “Entrepreneurs’ Relief” scheme.
What is Entrepreneurs’ Relief?
The Entrepreneurs’ Relief scheme was originally started back in 2008 with the intention of giving some tax relief to SME’s with regards to capital gains tax. An individual is given a lifetime limit (previously £1million – now raised to £2million under the new budget (£5million under the Emergency Budget announced on 22nd June)) under which they are given relief from capital gains tax.
What is Capital Gains tax?
Tax is charged at a rate of 18% on any capital gain made by an individual in the course of running or disposing of a business. “Capital gain” is defined by HMRC as “…the amount by which the disposal value of a chargeable asset exceeds its acquisition value.” In layman’s terms this means if when selling an asset you make more money than you actually paid for it, then you will be liable to pay tax on that profit at the current rate (18%).
How does Entrepreneurs’ Relief help?
The Entrepreneurs’ Relief scheme means that any individual making a capital gain, will not have to pay the full tax rate (18%) but instead will only be required to pay a lesser rate up to their lifetime limit. As long as they satisfy the necessary criteria (see below). So therefore, if you dispose of an asset and in doing so make a capital gain of £100,000 you will only be required to pay the lesser rate. Things get a bit more complicated where multiple assets have been disposed of. Here, the capital gains and capital losses must be balanced to come up with a net figure. If that number is a capital gain and that amount is below the limit (now £5 million) then the gain is subject to a lesser tax level. The calculations on this are a little perplexing. The HMRC defines it as thusly:
This ‘net gain’ is then reduced by 4⁄9 and the reduced figure is chargeable at the rate of Capital Gains Tax – 18% for 2009–10 but at an effective rate of 10%.
To clarify 4/9 is roughly 44%. So if you had a capital gain of £100,000, then you would find 44% of this figure (100,000 x 0.44 = 44,000) and that figure is then taxable at the standard capital gains tax rate, rather than the entire amount. You can see that this is quite beneficial for entrepreneurs as it provides substantial tax relief. With relief, you pay £7,920 tax on a £100,000 gain, without it you would pay £18,000! When you consider that Entrepreneurs Relief is now set to a lifetime limit of £5 million you can see the Government are making a substantial subsidy for business people.
Multiple claims can be submitted, but only up to the lifetime limit.
What are the qualifying criteria?
There are certain specific qualifying criteria which need to be satisfied in order to benefit from Entrepreneurs’ Relief. Firstly the gain must have been made on assets used in/by the business or assets owned by the relevant person but used by the business. The claim must be submitted within a year of the disposal and apply to:
– Disposal of whole business – which the individual owned.
– Ceased business – assets sold 3 years after business ceased trading (?)
– Sale of shares of your personal company*
– Associated disposal – basically disposal from a partnership
*personal company is defined as a company in which a person holds at least 5% of the ordinary share capital (and the voting rights that go with it).
Why is this good for me?
If you are thinking of running a business, starting a limited company or multiple limited companies, it means that in the long term, if the business does well and you eventually sell it, you will be required to pay far less tax. This is just one of the ways to make your business tax efficient. Choosing to carry out a company formation with TheCompanyWarehouse.co.uk we can help give you guidance on the best ways to make your company tax efficient and thus make more money for yourself.