When you’re closing down your company through an MVL, you may be able to qualify for Entrepreneurs’ Relief. To be eligible, you must have been one of the following: Owner of the business Sole trader Business Partner You must have been in one of these positions for at least the past 2 years. For example, you won’t qualify if you’ve only owned the business for 6 months. Additionally, you must claim for Entrepreneurs’ Relief within 3 years of the company’s closure.

Qualifying for entrepreneurs’ relief on the sale of shares is pretty complex. There is an extensive range of criteria that must be met to qualify. Generally speaking, you must: Be selling shares from a trading company – not an investment company Have been working for the company for the past 2 years (either as an office holder or a shareholder) Have at least 5% voting rights Have at least 5% of the shares

What Is Entrepreneurs' Relief?

Entrepreneurs’ relief – now known as Business Asset Disposal Relief – is a type of tax relief available to UK business owners.

It allows business owners who are liquidating their solvent company to cut the rate of Capital Gains Tax they pay in half, down to just 10%. This can result in huge savings for eligible directors and shareholders.

In this guide, we’ll explore how Entrepreneurs’ Relief works, who is eligible, and how you can apply.

What Is Capital Gains Tax?

To understand Entrepreneurs’ Relief, you first need an understanding of Capital Gains Tax.

When you liquidate your company, net assets are often subject to Capital Gains Tax. Capital Gains Tax only applies to the profit made on the sale of an asset, not the whole amount received. For example, if you bought an asset for £3000 and then sold it for £4000, only the £1000 profit would be taxed.

Typically, to qualify for Capital Gains Tax, you must enter into a Members’ Voluntary Liquidation (MVL). This is a type of solvent liquidation which functions as a tax-saving exercise, allowing company directors and shareholders to enjoy greater net returns.

You can qualify for Capital Gains Tax without an MVL, but all amounts over £25,000 will be subject to full Income Tax. If you’re looking to close a business with lots of assets, it’s more cost-efficient to pursue an MVL.

How Does Entrepreneurs’ Relief Work?

Entrepreneurs’ Relief halves the rate of Capital Gains Tax from 20% down to just 10%.

Although not everyone can qualify, those who are eligible can enjoy huge tax savings – this can make an MVL even more tax-efficient.

The rules around Entrepreneurs’ Relief were changed in 2020. Previously, each person could apply for a lifetime limit of up to £10 million in Entrepreneurs’ Relief. This lifetime limit has now been reduced to £1 million. Returns over this lifetime cap will be subject to full-rate Capital Gains Tax.

Who Can Qualify for Entrepreneurs’ Relief?

There are a variety of criteria which determine whether you can apply for Entrepeneurs’ Relief. Your eligibility depends on how you’re disposing of your assets.

Closing the Company

When you’re closing down your company through an MVL, you may be able to qualify for Entrepreneurs’ Relief.

To be eligible, you must have been one of the following:

Owner of the business
Sole trader
Business Partner

You must have been in one of these positions for at least the past 2 years. For example, you won’t qualify if you’ve only owned the business for 6 months.

Additionally, you must claim for Entrepreneurs’ Relief within 3 years of the company’s closure.

Selling Shares

Qualifying for entrepreneurs’ relief on the sale of shares is pretty complex. There is an extensive range of criteria that must be met to qualify.

Generally speaking, you must:

Be selling shares from a trading company – not an investment company
Have been working for the company for the past 2 years (either as an office holder or a shareholder)
Have at least 5% voting rights
Have at least 5% of the shares

Selling Shares as part of an Enterprise Management Incentive

If you purchased your shares as part of an EMI scheme, you there are additional criteria to be met:

You must’ve owned the shares for at least 2 years
You must’ve bought the shares after 05/04/2013

You will also need to meet the criteria faced by regular shareholders.

Selling Your Business

If you’re selling your business, you must fall under one of the following criteria:

Have been a partner for the past 2 years
Have been a sole trader for the past 2 years
Have owned the business for the past 2 years

What Is a Members' Voluntary Liquidation?

If you’re looking to close a business with net assets of over £25,000, an MVL is your strongest option. It is a solvent liquidation procedure which allows companies to return their assets to directors and shareholders in a highly tax-efficient manner.

Although a Members’ Voluntary Liquidation requires you to pay for some professional fees, they pale in comparison to the tax savings it offers – especially if you’re able to qualify for Entrepreneurs’ Relief.

An insolvency practitioner carries out the procedure; this saves you the worries that come with shutting down a company yourself. There are legal requirements that come with striking off your own company, which – if you fail to meet them – can result in you being hit with large fines or even criminal charges.

An MVL ensures your business is closed properly, all while saving you money.

Speak to an Expert Today

If you’re looking to close down a solvent company, you should seek the financial advice of an accountant or insolvency practitioner.

Our team can assess your company’s finances, letting you know if an MVL is worthwhile and whether you’re eligible for Entrepreneur’s Relief. If your net assets are too low, we’ll recommend you pursue a voluntary strike-off instead.

Get in touch to book a free consultation today.