Technical Briefings
09 December 2009
Entrepreneurs’ relief for sole traders
Sole traders have become used to paying only 10% tax on disposals of their business assets. This article will concentrate on areas sole traders should consider to ensure that the 10% tax rate will still apply on the sale or cessation of their businesses.
I understood taper relief. Isn’t entrepreneurs’ relief the same as taper relief?
No! There is a completely different set of conditions to be met to qualify for 10% tax rate under entrepreneurs’ relief. Fundamentally, there must be a disposal of a material interest in a business to consider whether you qualify for relief on selling an asset. Under taper relief you could sell any asset used in any business and potentially qualify.
How much tax is at stake?
Only £1m of gains are eligible for the 10% tax rate and any gain over this amount or not qualifying for entrepreneurs’ relief will be charged at 18%. The maximum saving you can now achieve is therefore £80,000.
What businesses qualify?
You must have a trading activity. A property investor will not ordinarily qualify as it is an investment business. The only exception will be for furnished holiday lettings which can potentially qualify for relief. The furnished holiday letting reliefs are being withdrawn from 6 April 2010 and you should consider action now as the 10% rate may not be available from that date on any disposals.
What do I need to do to sell my business and qualify for relief?
You must have been carrying on a trade for at least 1 year and dispose of the whole or a material part of a business.
What is a material part of my business?
Merely reducing the level of your trading activities will not qualify. It is necessary that your business is fundamentally altered by the disposal and if you are considering a partial disposal you should take expert advice as this is a complex area.
If I sell my property which I use in my trading business will this gain qualify?
The asset must be in use by the business at the date of disposal of the business. On its own it will not qualify. There is no restriction on the length of time that the asset has to be used in the business only that the business has to have traded for at least 1 year.
What happens if only part of the property is used in my business?
There is no restriction where the asset has only been used partly in your business regardless of whether the property has been let to another entity for the period of ownership. This does present planning opportunities.
What happens if I sell a business asset after I have sold my business?
You have up to 3 years to sell an asset which was in use in the trade at the date of sale or cessation.
If you sold your business say in June 2008 and owned property used 50% in your business you would have up to May 2011 to sell the property and claim entrepreneurs’ relief on the whole gain. This is regardless of the fact that the property may have been fully let between June 2008 and May 2011. As long as it was partly used in your business at June 2008 it would qualify for relief.
Summary
This is a complex area and it is essential that you talk to your tax advisor concerning your future plans to ensure that you maximise the relief available to you and avoid the many pitfalls.