The lifetime limit on Entrepreneurs’ Tax Relief was raised from £1 million to £2 million in the UK’s 2010 budget.
This relief enables many entrepreneurs to pay just 10% capital gains tax when they sell the assets they create, rather than the standard flat CGT rate of 18% [1].
The £2 million allowance is spread over your whole lifetime.
For example, if you sell two businesses in your life for £2 million, you’ll only pay 10% on the capital gains.
Sell a third business and you’ll exceed the Entrepreneurs’ Tax Relief lifetime limit of £2 million. You’ll therefore pay 18% CGT on the gains above the limit.
The Entrepreneurs’ Tax Relief can be applied to:
- Capital gains made on the disposal of all or part of a business.
- Capital gains made on disposals of assets following the cessation of a business.
- Capital gains made by individuals involved in running a business.
Note that the lifetime limit also applies to a company’s shares, providing you own at least 5% of the company (and have voting rights), and that you’re an officer or an employee.
The origins of Entrepreneurs’ Tax Relief
Why does this special perk for entrepreneurs exist, you may ask? After all, the flat 18% CGT rate isn’t particularly high compared to other countries.
The reason is that you could previously sell business assets at a lower rate, and you could also claim taper reliefs to reduce capital gains tax [2]. That old regime aimed to take into account inflation and reward long-term ownership.
When the Government brought in the flat 18% tax rate in 2008, this all went out the window. As a result, small businessmen – think local traders or professionals such as dentists and vets – suddenly faced an effective 80% rise in the CGT they’d pay when they sold up at the end of their careers.
It’s these traditional and established small enterprises who lobbied for this tax break, and who benefit most from it. It’s not particularly designed to encourage the next Richard Branson.
For more official details on the Entrepreneurs’ Tax Relief, check out the official HMRC page [3].