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How does entrepreneurs’ relief work?

Q. Due to IR35 reform I’m thinking of closing my personal service company next year and claiming entrepreneurs’ relief. First of all, what is it and how does it work? 

A. Entrepreneurs’ relief is a tax break that means anyone who has owned or run their own business for two years or more prior to selling it will pay less in Capital Gains Tax – which is payable on all assets disposed of or sold. In your case, it will apply when you dispose of shares in all or part of your business. 

If you’re wondering how entrepreneurs’ relief works in practice, we’ll explain. Let’s say the money held in your company account amounts to £50,000 at the date of closure and the value of your share capital at the date of incorporation was £100. In this scenario, the taxable gain would be £49,900. Of this amount, the first £12,000 is exempt from tax due to your Capital Gains Tax personal allowance, while the remaining £37,900 is taxable at 10%. This £3,790 tax liability would then be declared on your self-assessment tax return and must be paid by 31st January.

There’s no limit to how many times you can claim entrepreneurs’ relief and you can claim up to £10m during your lifetime. The same rules apply regardless of the rate of income tax you pay.

Q. Secondly, from what I gather, after closing my company and claiming entrepreneurs’ relief, I’ve heard that I wouldn’t be able to set up another personal service company in the IT industry for two years. Is this correct? 

A. That’s right, yes. There are rules in place to prevent people from closing their companies regularly in order to dodge tax. This is why shutting down your limited company is not a decision you should take lightly, given that you will not be able to form another similar one for a couple of years. 

As our IR35 partner, Qdos Contractor recently explained in Contractor Weekly, while IR35 reform certainly poses a risk to contractors, that’s not to say you won’t be able to operate outside the legislation from April 2020 onwards and need to close down your company.

Q. Finally, I was wondering whether I’m able to work as a permanent employee (still as an IT developer) in those two years and still claim my entrepreneurs’ relief?

A. Absolutely. There are no restrictions in place to stop you from operating in the same industry as an employee, should you decide to. 

This answer was provided by contractor accountancy, QAccounting.

By Contractor Doctor

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3 thoughts on “How does entrepreneurs’ relief work?”

  1. Mike W

    Not sure the example is as straight forward as that? I’ve been led to believe that if the capital in the company is in excess of £25k then it has to be closed by engaging an official liquidator which will cost approx £3-4K.

  2. DavidX

    You are right to say the company has to be closed (using members voluntary liquidation) by a registered with the Insolvency Service. You cannot simply apply to strike off the company. However, the cost can be much less than £4k. There are a number of fixed price deals (c£800 plus disbursements) on on offer provided the company is simple to close (ie all the funds held as cash, all debts paid, up to date with filings etc).

  3. DavidX

    I see that QDos say you can put the company into liquidation, claim ER and then seek work as an employee.
    Anyone know if you can take ER and then work under via an umbrella rather than as employee for the end client?

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