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Tax Tip

Entrepreneurs’ relief Literally worth a fortune!

The raising of the lifetime limit in the 2011 Budget from £5 million to £10 million was certainly a welcome boost to businessmen.

As long as certain conditions are satisfied, a husband and wife disposing of a qualifying business or shares in a qualifying company, could make tax savings of up to £1.8 million each!

Sounds too good to be true? Not really, as long as those conditions are satisfied.

In a nutshell, the business must carry on a qualifying trade, with little or no non-trading activity.

Next, for a sole trader or partnership, the whole of the business must be disposed of or, at least a distinct part of the business, as a going concern, or when the business has completely ceased trading.

For a shareholder in a limited company, he or she must work as an officer or employee for the company and own at least 5% of the issued share capital.

The good news is that, under Entrepreneurs’ relief, the ownership period is only one year (it was up to 10 under the previous regime, Taper relief).

The bad news is that, unlike Taper relief where an infringement during the ownership period only caused a pro-rata disallowance, under Entrepreneurs’ relief one infringement wipes out the relief entirely! As stated above, this could cost a husband and wife up to £1.8 million in tax each.

Finally, there is relief for associated disposals - basically the sale of an asset used by the company or partnership but owned by the individual(s) in a personal capacity. As long as the associated disposal follows the main disposal then this can also be covered by the relief.

There are pro-rata restrictions when rent is received by the individual(s), but only from 6th April 2008.

The advice given here is therefore very simple – constantly review your entitlement to relief and take action as soon as possible if that entitlement is threatened.

This article only covers the basic provisions and, as usual, proper professional advice should be sought before considering such actions.

Please contact us if you have any concerns or queries regarding the above.

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