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Entrepreneur’s Relief

hen you decide to sell or close your company via a members voluntary liquidation (MVL), you may be eligible for Entrepreneur’s Relief to reduce 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.

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 entrepreneur’s relief via an MVL.

If you are a director/shareholder planning to sell or close your company, entrepreneur’s 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 £10m over your lifetime.

How do I qualify for entrepreneur’s relief?

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

  • You must apply as an individual
  • You should be an employee of the company you are claiming against
  • 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 Entrepreneur’s Relief if you feel that you fulfill the above criteria and if your company has gone through an MVL, then on most occasions, you will qualify for entrepreneur’s relief.

Important points

Entrepreneur’s 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 £10m lifetime limit. You will not be entitled to entrepreneur’s relief on any and all new businesses after this limit has been reached.

Spouses of claimants of entrepreneur’s 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.

Entrepreneur’s relief and MVL

After selling or closing your company via MVL, you can claim entrepreneur’s relief on the capital distributions which go to shareholders after closure.

You will need to pay capital gains tax on the capital from the sale/closure of your business but a successful claim for entrepreneur’s relief reduces the amount of this tax you will owe.

As a result, when you use the MVL procedure to receive surplus funds from the appointed liquidator, you could make significant savings in tax with entrepreneur’s relief.

Authored by Andy Wood

Andy Wood

Associate Director & Licensed Insolvency Practitioner