Entrepreneurs’ Relief can save you a small fortune on your tax bill.
Legal scheme put in place by the UK Government.
The scheme allows for a 10% rate of Capital Gains Tax on profits over its lifetime.
It will reduce the amount of Capital Gains Tax you owe upon closure.
This can be done through an MVL.
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Whether you decide to sell or close your company, you are required by law to pay Capital Gains Tax on the profits that you make personally. However, by applying for Entrepreneur’s Relief, you could save money on the amount of tax you need to pay as you will only have to pay the 10% reduced Capital Gains Tax rate.
The following information is provided for guidance but as individual circumstances vary we strongly recommend taking advice from a tax specialist before making any decisions.
What is entrepreneurs Relief?
Entrepreneur’s Relief can save you money on your tax bill if you are a director planning to sell or close your company. Where an entrepreneur is selling all or part of their investment in a company, the scheme allows for a 10% rate of Capital Gains Tax on profits over its lifetime.
The 10% Capital Gains Tax is lower than the traditional rate and the current basic and higher rate taxes. However, there is a limit on the amount you can claim which is capped at £10m over the lifetime.
There are certain criteria you will need to fulfil to be eligible for Entrepreneur’s Relief on profits and assets from your company. These include:
- You must be an individual.
- You should work as an employee of the company.
- You will need to own at least 5% of the company as well as having at least 5% voting rights. You must also have owned your share in the company for at least 12 month before the business ceased trading.
Also, if your company has gone through a Member’s Voluntary Liquidation (MVL) then on most occasions it will qualify for Entrepreneur’s Relief.
Conditions for Entrepreneur’s Relief
Entrepreneur’s Relief must be claimed within 12 months after 31st January following the tax year which the company was sold off or closed down in.
All businesses an individual has set up can be included in the claim but there is a £10m lifetime ceiling limit. Once the £10m limit has been reached, directors are no longer entitled to Entrepreneur’s Relief on any and all new businesses.
The spouse of a claimant of Entrepreneur’s Relief can also make a claim if they own 5% of the company and they work there as an employee in some capacity.
MVL and Entrepreneur’s Relief
Following the sale of a company via MVL, the owners can claim Entrepreneur’s Relief on capital distributions to shareholders when it closes down. This can be done through an MVL or an informal winding down procedure.
By claiming Entrepreneur’s Relief, it will reduce the amount of Capital Gains Tax you owe upon closure. Therefore if you close your company with a MVL and take all the money remaining in the business bank account as a capital distribution (after necessary payments to shareholders), you could make big savings in tax under the Entrepreneur’s Relief scheme.
If you are considering entering your company into a MVL, get in touch with us. We can advise you on your options and start you on the road to closing your company quickly and easily.
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