Capital Gains Tax and Entrepreneurs Relief

If you run a Contractor Limited Company it is a good idea to know about Capital Gains Tax and Entrepreneurs Relief.

Are you a highly skilled expat Contractor? Would you like to maximise your contract income and work towards a visa extension or visa transfer? If so Commonwealth Contractors can help!

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0330 390 9021 or Submit your Details and we will get right back to you!

Capital Gains Tax & Entrepreneurs Relief

The standard rate of UK Capital Gains Tax (CGT) is 28% (2015 / 2016). Each person has an annual CGT allowance which rises from £11,000 in 2014-15 to £11,100 in 2015-16. Thus only gains in excess of £11,100 in the year are subject to a CGT liability.

Individuals whose income means that they are not higher rate taxpayers pay CGT at the rate of 18% on that section of the gain which, if it were added to their income, would fall into the ‘basic rate’ earnings band.

Subject to a lifetime limit of £10million of such gains, a reduced Entrepreneurs CGT rate of 10% applies to ‘business assets’ such as interests in a qualifying sole-trader, partnership (either unincorporated, Limited partnership, or LLP) , or Limited company business.

To qualify for Entrepreneurs relief:

  • You must have owned the business asset for at least a year, AND
  • The asset must not be goodwill if the sale was after 3rd December 2014
  • If the business is incorporated;
    • It must be a trading company OR a holding company of a trading group, AND
    • You must hold at least 5% of the shares and voting rights, AND
    • You must be either an officer or employee of that company (or an officer or employee of one or more members of the trading group)

The requirement that it must be a trading company

  • Excludes companies that are property or investment holding companies. Running a furnished holiday let business counts as trading, but letting property on longer term tenancies does not.
  • Is assessed based on the activities of the company. To be classed as a trading company, the company must carry on trading activities and to no substantial extent carry on activities other than trading activities e.g. investment activities. If a company carries on trading activities and has no investments on the balance sheet it will qualify as a Trading Company. Once there are assets on the balance sheet which constitute investments, the company must consider the “to no substantial extent” requirement. Informal guidance suggests that a 20% threshold is used across the areas of;
    • The proportion of directors time spent on each activity (trading activity Vs Investment management/holding)
    • The proportion of the company’s income derived from each activity, (trading activity Vs Investment management/holding), and
    • The proportion of Balance sheet assets held in relation each activity (trading activity Vs Investment management/holding). In this respect
    • Large cash balances on a balance sheet can be a problem, but if the cash is not actively managed and it is derived from the trading activity it may be argued that the holding of the cash is incidental to the trade rather than a separate activity.

Entrepreneurs with companies that have significant assets may choose to take advance action so that during the 12 months running up to disposal, all the company’s activities unambiguously qualify as trading activities.

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