When choosing entrepreneurship as a career option, there are several things that an entrepreneur has to go through. Starting a new business is not an easy task, there are several challenges faced by an entrepreneur at the beginning of their start-up business. Many entrepreneurs work hard and flourish their business in no time. However, there are some who are unable to earn a name in the market. There may be several reasons why any start-up business was unable to flourish. One very crucial problem may be the lack of required resources.
Related: How to sell your business
Entrepreneurs’ relief explained
There are many entrepreneurs who wish to sell or give away their business due to several reasons. Some simply do not have time to manage their well-established business while others are not satisfied with their company or business. Irrespective of what the reason may be, entrepreneurs may gain benefits by selling or giving away their business at a reduced tax rate. This benefit is called entrepreneurs’ relief. (1)
Entrepreneurs may sell or give away their business and claim entrepreneurs’ relief. Entrepreneurs’ relief is available for up to £10,000,000 lifetime gains. This certain amount of money is called entrepreneurs’ relief for a reason. Entrepreneurs gain tax relief at a reduced rate of 10%. (1)
Entrepreneurs’ relief is available to sole traders or partners selling or giving away whole or a certain part of their business. It is also available to company directors and employees having 5% or more shareholding.
Formulation of Entrepreneurs’ Relief
The need of entrepreneurs’ relief was felt long before when many entrepreneurs started to feel the need to sell their business or give away their business. There are many entrepreneurs who wish to sell whole or a part of their company and gain maximum benefit from it.
Increase in Entrepreneurs’ Relief since 2008
Entrepreneurs’ relief reduced the amount of Capital Gains Tax paid on business assets on or after April 2008. So the entrepreneurs’ relief began in the year 2008. Today, in the United Kingdom entrepreneurs selling or giving away their business can obtain entrepreneurs’ relief which is an allowance of £10,000,000. However, this is the modern day amount. During and after the year 2008 there have been several changes in the amount.
In March 2010, the entrepreneurs’ relief was up to £2 million.
Three months later, it was raised to £5 million.
In March 2011, the budget was then raised to £10 million.
Conditions and requirements for Entrepreneurs’ Relief
Entrepreneur’s relief may be considered as one of the most attractive tax benefits any entrepreneur may obtain. By taking appropriate steps, entrepreneurs may gain maximum benefit from entrepreneurs’ relief. There are some measures that need to be taken care of to gain maximum benefit from entrepreneurs’ relief. If the requirements for availing entrepreneurs’ relief are fulfilled appropriately, then any entrepreneur selling or giving away their business may gain a lot of benefits and the entrepreneurs’ relief may prove to be quite useful.
- The first and the most important thing to keep in mind is that all the conditions for entrepreneur’s relief must be met for at least 12 months. This means that any entrepreneur claiming entrepreneurs’’ relief must keep the business appropriate for the relief at all times.
- Today, the limit of entrepreneurs’ relief is £10 million per person. It is a considerable sum and any entrepreneur selling or giving away their business can be entitled to have this money.
- Any start-up business that is unhappy or unsatisfied with the outcome can gain benefit from the entrepreneurs’ relief. By earning this amount of money, any entrepreneur may gain insight and acquire resources to start from scratch.
Since 2008, when entrepreneurs’ relief was first introduced several entrepreneurs have gained benefit from entrepreneurs’ relief.
Recent changes in Entrepreneurs’ Relief
In the past couple of years, laws and policies concerning entrepreneurs’ relief have been significantly modified, as a consequence of the UK Government’s initiative and attempts to rectify the loopholes in the system. These changes are mainly related to capital gains tax.
One of the major concerns that the UK Government has been trying to resolve is the establishment of a workable policy and machinery to provide greater tax relief on an individual’s business assets than that on his personal or investment assets. The introduction of the policy that led to the reduction and elimination of tax payments in direct proportion to the period for which the assets are being held is one of the government’s attempts to extend increased support towards entrepreneurs’ relief.
Capital gains tax
In addition to the previously stated initiative, the government also introduced a policy of reduced capital gains tax rate on all gains. Under this policy, the capital gains tax, as an attempt to facilitate entrepreneurs’ relief, was decreased to a rate of 18%, on all gains acquired through the sale of a business entity.
However, capital gains tax, as an integral part of entrepreneurs’ relief policy, by the government has been subjected to further alteration. The government has applied changes to the payment of capital gains tax, mainly on the basis of higher rate threshold defined for capital gains and standard rate band. Entrepreneurs whose capital gains exceeded the higher rate thresholds were required to pay a capital gains tax at a rate of 28%, while those whose capital gains were within the stated limits of standard rate band were liable to make a capital gains tax payment at a rate of 18%.
These initiative, concerning the reduction and tapering of capital gains tax are primarily focused on encouraging entrepreneurial initiative and ensuring the prospective entrepreneurs do not feel reluctant to lay down the foundation of a new business setup, as a result of their concerns surrounding the payment of a considerable amount on account of capital gains tax, if ever in the future a business needs to be sold. It is believed that through facilitating entrepreneurs, entrepreneurial culture is to be given a boost which will eventually contribute towards the creation of more job opportunities and acceleration of economic growth.
As the significance of entrepreneurs’ relief for supporting economic growth has been widely acknowledged, the government has taken the initiative to provide further support to entrepreneurs under this policy. The rate of capital gains tax has been reduced to 10%, for lifetime capital gains that are within the limit of £5 million. This modification in the policy has particularly benefitted established entrepreneurs, who now wish to explore new pastures or are thinking about retiring2.
Challenges faced while availing Entrepreneurs’ Relief
The recent changes concerning entrepreneurs’ relief though have largely benefitted the majority, but there are some sections which may suffer as a consequence of newly introduced changes.
Sale of loan notes
The first major impact of these changes concerns the eventual CGT position of loan note holders. Those entrepreneurs, who might have exchanged their shares that qualified for entrepreneurs’ relief, for loans, are advised to re-examine their CGT positions at the eventual sale of their loan notes. There are chances that if the loan note holders proceed to sell these possessions, they may be liable to pay CGT at an increased rate, rather than the expected rate of 10%.
Also, with the recent development concerning the entrepreneurs’ relief policy and its increasing popularity, it is expected that HMRC might introduce some modifications in the policy. It is believed that these changed are mainly to be concerned with the qualification criteria for entrepreneurs’ relief. Hence, under the changing circumstances, entrepreneurs need to be wary and aware of their statuses for qualifying for entrepreneurs ‘relief.
Impact on shareholders
Since entrepreneurs’ relief policy has also been subjected to changes concerning the qualification of shareholders, shareholders may find themselves surrounded in ambiguity, with respect to their qualification for availing the facilities offered through entrepreneurs’ relief. To be sure of their current position, shareholders today need to study and understand all the recent changes incorporated into the entrepreneurs’ relief policy.
Perhaps, the impacts of the recent changes in the entrepreneurs’ relief policy are to be most deeply felt by sole traders and those entrepreneurs who are working in partnerships. The recent changes are to render significant negative impacts on the sale of shared business assets, which may be proposed to be sold separately3.
Furthermore, questions are being raised ion the structural development of entrepreneurs’ relief policy by various experts. Many have pointed towards the need to modify the structure of the policy to ensure that the extension of entrepreneurs’ relief support is extended to individuals who have owned considerable shares in business but fail to qualify for entrepreneurs’ relief due to unfulfilled technical requirements. The major issue in this area is associated with the requirement for entrepreneurs to own business assets for a prescribed period of time in order to qualify to be facilitated through entrepreneurs’ relief4.