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Entrepreneurs’ relief oddities

As you know, there was a dramatic increase in the limit of this valuable relief which now goes to £5 million of lifetime gains instead of the previous £2 million (when this relief was introduced the limit was £1 million). As it serves to reduce the CGT rate to 10% it is even more important to make sure that a business disposal qualifies if at all possible. The alternative is paying CGT at the new rate of 28% (18% if a basic rate taxpayer, but for that purpose the gain is added to income, so it is unlikely to help).

But there is a bolt out of the blue for some people, where the previous tax rules have changed. This is where the CGT on a gain of any type is deferred by way of an investment in an Enterprise Investment Scheme (EIS) type of company, or you sell shares in a business in exchange for loan notes in the purchaser company.

The way that entrepreneurs’ relief works when a chargeable gain is deferred via an EIS investment has changed where the deferred gain arose from 23 June 2010. It gives you a choice – either (a) claim entrepreneurs’ relief if available and pay CGT at 10% but make no deferral claim; or (b) do not claim entrepreneurs’ relief but claim EIS deferral and then when the deferred gain comes into charge it is taxed at 28%.

The new rules mean careful consideration of your options is essential. There are odd transitional rules in place where the deferred gain arose before 23 June 2010.

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