Entrepreneurs’ Relief: what it is, how you can claim

Published • 01/07/2024 | Updated • 01/07/2024

Taxes

Entrepreneurs’ Relief: what it is, how you can claim

Published • 01/07/2024 | Updated • 01/07/2024

Taxes

There’s a lot to think about when selling off or winding up your business, and one big consideration is how you can reduce the tax on profits you make from the process.

This is where a scheme called Business Asset Disposal Relief can come into play. Still widely known by its former name, Entrepreneurs’ Relief, this tax break can benefit your bottom line if you meet certain eligibility requirements and stick to HMRC’s deadlines on claiming.

Whether you have a business which makes money online or you’re running a retail outlet on the high street, knowing the ins and outs of Entrepreneurs’ Relief can save you serious money at some point in your journey as an entrepreneur.

In this guide, we’ll explain exactly what Entrepreneurs’ Relief is, how it can affect how you pay yourself as a business owner, how you can claim Entrepreneurs’ Relief, and more.

Entrepreneurs’ Relief was given the new name “Business Asset Disposal Relief”, or BADR, back in 2020, but the rebranding didn’t impact how this tax break works. As the original name is still widely used, we’ll continue to refer to it as Entrepreneurs’ Relief in this guide.

What is Entrepreneurs’ Relief?

Entrepreneurs’ Relief is a tax break that can reduce the Capital Gains Tax you owe to HMRC. This relief is targeted at individuals rather than companies, and it’s available no matter your usual tax bracket.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is the tax you pay on profit from selling an asset which has increased in value. You’re only taxed on the gain, not the total sale amount.

For example, if you sell a business or shares for more than you bought them, the profit is subject to CGT. The rate of Capital Gains Tax you would normally pay on gains from business assets depends on your income tax bracket.

  • For basic rate taxpayers, it’s 10%

  • For higher and additional rate taxpayers, it’s 20%

How much is Entrepreneurs’ Relief?

By applying Entrepreneurs’ Relief, the CGT rate is consistently 10% across all qualifying gains.

So, this relief offers big savings if you’re a higher or additional rate taxpayer and can help you avoid moving into a higher tax bracket if you’re a basic rate taxpayer.

Can you claim Entrepreneurs’ Relief more than once?

You can claim Entrepreneurs’ Relief on the first £1 million of gains you make in your lifetime. In other words, you can take advantage of this perk as many times as you like, up to the Entrepreneurs’ Relief lifetime limit of £1 million. Any gains above this threshold are taxed at the standard rate.

Manage finances with ease

As you explore tax benefits like Entrepreneurs’ Relief, keeping close track of your finances is crucial. Set up directly from your mobile phone, a SumUp business account offers a simple way to separate business and personal finances, and comes with a handy Mastercard for day-to-day spending.

Open your account

How do you qualify for Entrepreneurs’ Relief?

There are different ways to qualify for Entrepreneurs’ Relief depending on your business structure. You might be eligible if you’re:

  • A sole trader or partner selling all or part of your business.

  • A company shareholder selling shares or securities in a company.

  • Closing your company.

  • Disposing of assets you lent to your business.

You may also be able to claim this relief if you’re a trustee.

Sole trader or partner selling a business

Selling some or all of your business? You can qualify for the tax break if you fulfil the “Entrepreneurs’ Relief 2 year rule”. This means you have to have operated as a sole trader or a partner in a business partnership for at least two years.

Let’s say you’re a sole trader bringing online business ideas to life. One such enterprise is an online store selling pet accessories which you’ve operated for five years, and which has now attracted a generous buyer.

Since you meet the qualifying criteria, you would benefit from this small business tax break on the gains you make from this deal.

Bear in mind that the simple sale of an asset, without changing the nature of the business, doesn’t qualify for Entrepreneurs’ Relief. For example, the gains made from selling a shop where the business operates won’t qualify for this relief if the business continues trading elsewhere.

Get your business online

Whether you want to branch out online or make it the exclusive basis of your business, get started right away with SumUp. There’s no coding or design experience required with the SumUp online store, as the user-friendly interface allows you to set up shop, sort your product inventory and sell to customers around the world with minimum fuss.

Open your online store

Selling shares or securities

To be eligible for Entrepreneurs’ Relief when selling shares or securities in a private company, the following criteria must be met for at least two years before your sale:

  • You’re an employee or office holder in the company, or a related company within the same group.

  • The company’s primary business involves trading activities, not investments (or it should be the parent company of a trading group).

Additional rules depend on whether your shares are from an EMI (enterprise management incentive) scheme or not.

EMI shares

EMI shares are an incentive designed to help small businesses attract talent by offering shares at a favourable price. So, do EMI shares qualify for Entrepreneurs’ Relief? Yes, under these conditions:

  • You purchased the shares after 5 April 2013.

  • You were granted the option to buy the shares at least two years prior to selling them.

Other shares

When it comes to regular, non-EMI shares, the business must be a “personal company”, meaning you own at least 5% of the shares and voting rights, plus entitlement to at least 5% of the profits and assets on the company’s liquidation or sale proceeds. You must meet these conditions for at least two years before the date of your sale.

Say you’ve been the director of a software company specialising in small business cyber security solutions for over two years, owning 50% of the shares.

Since the company engages in a qualifying trading activity and you’ve held a sufficient share percentage for a suitable length of time, you can benefit from Entrepreneurs’ Relief when you sell your shares.

Special considerations

Here are a few other potential scenarios involving shares and Entrepeneurs’ Relief which you should also be aware of.

  • Dilution – If your shareholding falls below 5% due to new shares being issued, you can usually still qualify by treating this as if you sold and repurchased your shares just before the new shares were issued, creating a gain eligible for relief. You’re allowed to defer the tax until you sell the shares.

  • The company stops being a trading company – In the event that a company stops trading activities, selling your shares within three years means you’ll still qualify for relief.

  • If you own shares in a company but have no other connection – If you own shares but aren’t an employee, you won’t qualify for Entrepreneurs’ Relief but may have more luck with Investor’s Relief.

Closing your company

If you’re a limited company owner, it’s natural to ask “Can you get Entrepreneurs’ Relief on liquidation?” Not only is the answer yes, but utilising this break when closing down your company is among the most effective small business tax tips to consider.

Say you’re brainstorming how to become your own boss and decide to launch a small limited company selling handcrafted homeware products. After years of successful training, you decide it’s time to move onto fresh pastures. 

Since the company’s viability rests entirely on your skills as an artisan, there’s no real prospect of finding a buyer. Instead, you decide to close it down by striking it off the Companies Register, and take out the retained profits as a capital distribution, which is subject to Capital Gains Tax.

Factoring in Entrepreneurs’ Relief, this is a far more tax efficient way to get your hands on your money compared to salary and dividends, which are subject to higher rates of Income Tax and tax on dividends.

If the amount being distributed during a strike-off exceeds £25,000, it will be subject to Income Tax. In this scenario, it may be more tax efficient to undergo an alternative, more formal winding up process known as Members’ Voluntary Liquidation, to ensure the money remains a capital distribution (and subject to Entrepreneurs’ Relief on tax).

Selling assets lent to your business

If you’re looking to sell assets that you previously lent to your company, there are a few conditions you’ll need to meet:

  • You must have sold at least 5% of your interest in a business partnership or shares in a personal company having been involved for at least two years.

  • You owned the assets and allowed your business partnership or personal company to use them for at least a year before you sold your business or shares or before the business closed.

Imagine you’ve been researching low cost business ideas and decide to start a mobile coffee cart using your personal espresso machine and other coffee-making equipment. You set up at local events and markets, and as demand grows, you partner with a local baker to offer more products.

After a couple of years, you decide to pursue a different course and sell the assets you lent to the business. Because you owned a significant part of the business and these items were loaned for over a year, you qualify for Entrepreneurs’ Relief on any gains you make from their sale.

Take in-person payments on your phone

If you run a food stall, restaurant, shop or any other in-person business, you need a payment solution that’s both wide-ranging and trustworthy. SumUp’s Tap to Pay on iPhone lets you take secure, contactless payments from an array of cards and digital wallets directly on your phone, making your business a convenient choice for customers.

Read more on Tap to Pay on iPhone

How to calculate Entrepreneurs’ Relief

Calculating how much Capital Gains Tax you owe with Entrepreneurs’ Relief is straightforward. Just follow these steps:

  1. Add up the gains made from each of your assets, which is the difference between what you paid for each asset and what you sold it for.

  2. Deduct the costs associated with the sales, such as the fees for valuing or advertising your assets (contacting HMRC if you’re not sure which costs can be included as tax deductions for small businesses).

  3. Deduct any losses made from the sales of assets.

  4. Deduct your annual tax-free allowance. Every year, individuals can realise some gains without incurring any Capital Gains Tax. For the 2024-2025 tax year, the annual allowance is £3,000.

  5. Pay 10% Capital Gains Tax on what’s left.

When you report a loss, it’s deducted from any gains in the same tax year. If your total taxable gain remains above the tax-free allowance, you can also apply unused losses from previous years. If these losses bring your gain down to the allowance, any remaining losses can be carried forward to future tax years.

If you have other gains to report

To work out your final tax bill, you may need to account for other chargeable assets (gains), like personal possessions worth over £6,000 (apart from your car) and property that’s not your main home.

If your total gains remain below the Capital Gains Tax-free allowance, you won’t owe any tax. However, starting from the 2023 to 2024 tax year, you still need to report gains if both of these conditions apply:

  • You sold assets for more than £50,000.

  • You have registered for Self Assessment.

How to report and pay Capital Gains Tax

You can report gains either:

  • In your Self Assessmenttax return

  • Using the real-time Capital Gains Tax service (UK residents only)

Self Assessment return

This option is probably the most straightforward. To use it, you should report your gains in a Self Assessment tax return for the tax year following the sale or disposal of the asset. Then, pay any Capital Gains Tax due with your overall tax bill by 31 January following the end of the tax year in which you made the gain.

For example, tax on gains in 2024 to 2025 must be reported and paidby 31 January 2026.

Real-time Capital Gains Tax service

Using this service, you should report gains by 31 December in the tax year after the gain was made. For example, gains in 2024 to 2025 must be reported by 31 December 2025.

You must pay any tax due by the Self Assessment deadline (31 January following the end of the tax year, for example by 31 January 2026).

Things to consider when you use the real-time service:

  • If you’re registered for Self Assessment, you should also include details of any gains in your tax return.

  • This service can’t report all gains. For example, UK residential property is excluded. However, it’s usually fine for business assets.

After reporting, HMRC will send you a payment reference starting with “X”. You can use this reference to pay using the online tax payment service, online banking, or cheque.

How to claim Entrepreneurs’ Relief

The most straightforward way to claim Entrepreneurs’ Relief is simply filling in the relevant sections of your Self Assessment tax return. Alternatively, you can submit a separate Claim for Business Asset Disposal Relief form.

Why understanding Entrepreneurs’ Relief matters

There’s a lot to consider when you’re learning about Entrepreneurs’ Relief, but understanding this tax break offers several benefits beyond saving your money. It can help with:

Financial planning

Knowing you can save on taxes might change when and how you decide to sell. By timing sales carefully to ensure you’re eligible for Entrepreneurs’ Tax relief – perhaps by selling individual assets or shares across different tax years to take advantage of your annual tax-free allowance – you can make the most of the relief and potentially boost returns.

Strategic planning

With a solid understanding of this relief, you can better plan the structure and growth of your enterprise to ensure you qualify when the time comes. This knowledge can inform everything from how you write your business plan to what you include in your SWOT analysis for small business, ensuring your strategy aligns with long-term tax advantages.

Reinvestment planning

The tax savings from Entrepreneurs’ Relief could free up capital for investing in more business opportunities. Whether you’re looking into starting new business ideas from home, exploring creative ways to make money, or considering buying a new point-of-sale or self-service order system for an existing business, having extra funds can help fuel your plans.

Boost your business’s appeal

If you’re building up a cafe or restaurant to sell, SumUp’s self-service kiosk can help make your business more attractive by boosting order values by an average of 25%. Plus, it cuts queues in half and frees up your staff to focus on providing great service and establishing a brand that buyers will love.

Find out more about kiosks

Risk mitigation

By lowering the tax burden on the transaction, Entrepreneurs’ Relief reduces the financial risk associated with a move as pivotal as selling your business, making it a key part of a robust small business risk management strategy. This could be particularly beneficial if you’re retiring and not planning to launch any more small business ideas.

Business valuations

Lower taxes can guide decisions about how to value a business in the lead up to selling some or all of it. Understanding the impact of this relief will allow you to undertake a more detailed and informed financial analysis of your business, ensuring you can pinpoint the right, competitive price when handing over the reins.

Getting help

There’s no denying that navigating Entrepreneurs’ Relief and managing taxes can be time-consuming and sometimes overwhelming. Fortunately, accounting tools and finance professionals can simplify and speed up the process.

Accounting tools

Whether you’re thinking about how to scale a business to sell in the future or your assets are already on the market, using accounting tools for small businesses make managing your finances a lot easier. These tools help track everything from invoices to overall cash flow, assisting with:

  • Managing your budget – Accounting tools help you monitor your income and small business expenses, enabling you to stay within your small business budget and make more informed financial decisions.

  • Preparing basic financial documents – Many software tools can automatically generate simple cash flow statements and other financial reports, giving you a clear understanding of the flow of money in and out of your business.

  • Simplifying bookkeeping – By automating bookkeeping for small businesses, these tools ensure that your financial records are accurate and up to date, reducing the risk of errors and saving you time in the lead-up to selling assets.

Specialist help

While accounting tools are great, many entrepreneurs prefer to hand over their financial workload to accountants or tax specialists who can help with:

  • Tax planning and compliance – Ensuring you’re making the most of tax perks like Entrepreneurs’ Relief and staying compliant with HMRC rules.

  • Strategic advice – Giving expert advice on financial planning to set and achieve realistic business goals.

  • Optimising your business structure – Helping you decide what structure is right for your business, whether it’s setting up a limited company or another entity type. They can also advise on the legal requirements for starting a small business. 

  • Managing complex transactions – Helping you deal with complex business transactions more efficiently.

By combining both accounting tools and professional expertise, and even considering how to hire employees who can take care of these tasks for you, you can ensure your business is well-managed and you’re making the most of available tax benefits.

This approach can free up your time to focus on other important activities such as brainstorming how to get clients, planning your marketing strategy, or deciding how to advertise your business.

Introducing SumUp One

Maintaining a healthy business requires efficient financial management. By subscribing to SumUp One, you can save time and money thanks to a flexible plan packed with features including full invoicing software, discounted card readers, and next-day payouts. Cancel and resubscribe online anytime.

Get a 7-day free trial

Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.

Entrepreneur Relief FAQs

Learn more about taxes

What is VAT →

Small business rates relief →

Business Rates →