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Entrepreneurs’ Relief

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When you decide to sell or close your company via a members voluntary liquidation (MVL), you may be eligible for Entrepreneurs’ Relief. This reduces the amount of Capital Gains Tax you will legally be required to pay on the sale of your company and/or its assets, from its standard rate to a reduced 10% rate.

See if an MVL is right for your business

As individual circumstances vary, the following information is provided for guidance and we strongly recommend taking advice from a tax specialist, before making any decisions on Entrepreneurs’ Relief via an MVL.

If you are a director/shareholder planning to sell or close your company, Entrepreneurs’ Relief via an MVL can save you money on your tax bill. You must be selling all or part of your investment in the company to be eligible for a 10% rate of capital gains tax.

This reduced 10% rate is lower than the traditional capital gains rate but be aware that there is a limit on the amount you can claim which is currently capped at £1m over your lifetime.

How do I qualify for Entrepreneurs’ Relief?

As with any sort of tax break scheme of this nature, there are certain criteria you will need to fulfil to pay the reduced tax as a result of Entrepreneurs’ Relief. These include:

  • You must apply as an individual
  • You should be an employee of the company which the claim relates
  • You will need to own at least 5% of the company and have at least 5% voting rights. Also, you will need to have owned your share in the company for at least 12 months before the business ceased trading.

You can apply for Entrepreneurs’ Relief if you feel that you fulfil the above criteria. If your company has gone through an MVL, then on most occasions, you will qualify for Entrepreneurs’ Relief.

Entrepreneur's relief

Important points

Entrepreneurs’ Relief will need to be claimed within 12 months after 31st January following the tax year in which the company was closed down or sold.

An individual can claim for a number of businesses and they will be included up to the £1m lifetime limit. You will not be entitled to Entrepreneurs’ Relief on any and all new businesses, after this limit has been reached.

From 11th March 2020, the lifetime limit on eligible gains has been reduced from £10m to £1m.

Spouses of claimants of Entrepreneurs’ Relief can also put forward their claim providing they own 5% of the company and they have been an employee at the company in some capacity.

In summary

Entrepreneurs’ Relief will allow you to make tax savings on the capital distributions when closing a company, which eventually go to the shareholders after the company’s closure. You will need to pay capital gains tax on the capital from the sale/closure of your business, but a successful claim for Entrepreneurs’ Relief reduces the amount of tax you will owe. As a result, when you use the MVL procedure, you could make significant tax savings with Entrepreneurs’ Relief.

How we can help

If you are looking to close your solvent company in a tax-efficient way, whether now or in the future, then an MVL could be the right option. We can help you make full use of Entrepreneurs’ Relief and walk you through the procedure. Our insolvency practitioners are highly experienced in ensuring that you meet the correct obligations to qualify for the tax breaks involved with Entrepreneurs’ Relief.

Authored by Andy Wood

Andy Wood

Associate Director & Licensed Insolvency Practitioner

Beverley Horton Christopher Callaghan Stephen Hall

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