The Limited Company contractor’s guide to Entrepreneurs Relief

Entrepreneurs Relief

 

What is Entrepreneurs Relief (ER)?

ER was created to encourage people to set up and grow their own businesses, by providing a reduced level of Capital Gains Tax (CGT) on business disposals (when you decide to either sell or dissolve your Limited Company).

 

Who can claim ER?

ER is available to shareholders who are trading using a Limited Company and who have held the business assets in question for more than 12 months. It’s usually applied to a business disposal or share sale, but can also be claimed for other assets.

 

You must have been a serving partner, director or employee and have held at least 5% of the share capital in the year preceding the sale, If you’re disposing of business shares.

 

How does ER work?

To calculate your personal ER, you must firstly deduct your CGT annual exemption from the amount of your gain. Then, multiply this gain by 10% to leave you with your CGT liability.

 

Should you be fortunate enough to reach the lifetime allowance threshold of £10 million, then any further gains are made at the standard CGT rates.

 

Remember!

There are deadlines for when ER must be claimed. If business assets were disposed of during the 2015/16 tax year, then you must make your ER claim by 31 January 2018.

 

You are able to make a claim on your Self-Assessment Tax Return, but we strongly advise you seek the professional advice and support of an expert Limited Company contractor accountant.
For more information Entrepreneur’s Relief, please visit HMRC’s website.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

It’s never too early to plan ahead

It’s never too early to plan ahead

We often get asked about how to be tax efficient when running a Limited Company, and what many people don’t realise is that this also ties in quite nicely with your final exit strategy from your Limited company.  If you take a long term view and plan ahead, you can save a fair amount of tax when you close down…….

Dividend income is effectively tax free in the basic rate band, and then at taxed 25% of the net when you stray into higher rates.  To work out the maximum dividend you can take before those higher rates kick in you simply take the higher rate limit of £41,865, reduce by other income such as bank interest, salary and rental profit, then divide by 10 and x by 9 (this can be slightly more complex when other income or pensions are involved, so ask your contractor accountant to double check your calculation).

 

So £41,865 less your salary of say £12,000 (plus other gross income) leaves £29,865 /10×9 = £26,878.

 

This means you can take dividends of £26,878 tax free, provided the company has the profit available to pay that amount.  You can take the dividend as a lump sum, or break it down into a monthly figure of £2,239.  This can be paid on top of expenses and salary you’re owed.

 

What happens to the rest of the profit that gets left in the company?  That’s the good bit.  Any final profit that is paid out to the shareholders when the company closes can in many cases be paid as a Capital Gain, which, after Entrepreneur’s Relief, is taxable at just 10%.  So you’ll pay 25% on higher rate dividends if you withdraw them year by year, or just 10% if you save the profit in the company to pay out on closure.  Over a few years this could save you a fair amount!

 

Talk to your contractor accountant to find out more details about when Entrepreneur’s Relief is available, and what you can do to plan now for your future.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.