What is entrepreneurs relief?

Hi, everyone. It’s Nishi at N Accounting. Hope you’re having a great day. Today, what I want to do is talk about tax. So, I’ve been doing a lot of videos about business and, as part of our Apex program, which you should definitely get in touch with me about, we do cover all aspects of business, including tax, finances, sales and marketing, and the people, team, and processes side of a business, as well.

So, but what I want to do today is just focus on one particular area. And today, I want to talk about tax. And the thing I want to talk about in tax is something called entrepreneur’s relief. And I want to just help people understand what it is and why it is so important. So, a while ago, the government wanted to promote small businesses becoming larger businesses. So, we’ve all seen it. There’s a lot of one man bands around. And the government wanted to do something which would encourage the one man bands to actually hire staff, build up their brand, build up their client base, and then turn their business into something they could actually sell down the line. And that’s why they introduced entrepreneur’s relief.

And what entrepreneur’s relief is, when you come to sell your business, or even if you have to wind your business down, because you don’t want to sell it. But let’s say when you come to sell your business, it’s a flat 10% rate of tax. So, if you’ve built your business from nothing, and you’ve got the goodwill value up to a million pounds, then what the government says is, when you can sell that business for a million pounds, you just have to pay us a hundred thousand pounds of tax, and you can keep the other 900,000. So those are quite extreme numbers, I know.

But, when you think about it, actually, if you were to sell a rental property, for example, your tax rate on that would either be 18 or 28%, depending on how much other income you’ve had, or what the gain on that property was.

So what entrepreneur’s relief does is actually, instead of paying the 18 or 28%, like you would on a lot of other assets, some assets you’d either pay 10 or 20%, but what the entrepreneur’s relief does is just gives you a flat 10% rate that you pay on your business sale. So, that is the business, the gain you made on the business sale. So, if you’ve got assets in that business that you paid for, and then you’re selling on, as well, you take those off. So really, you’re talking about the goodwill in your business. So if you make a million pounds selling the goodwill in your business, then what entrepreneur’s relief does is it just gives you that flat percent, 10% rate.

And that’s great because if you sold a lot of other assets, like Bitcoins or properties, your rate of tax will be higher. So the business, selling a business gets you a preferential rate, as a reward for growing and building that business.

Couple of things to think about with entrepreneur’s relief. It’s not as generous as it used to be, because there was a time, and actually, entrepreneur’s relief. I think it’s known as business asset disposal relief these days. So BADA. So you might need to look that up. But it’s, I think, entrepreneur’s relief is a colloquial term for it.

But, one of the key things though, is you used to be able to sell a business for up to 10 million pounds and get this entrepreneur’s relief. But now, the government’s recently reduced that to a million, which is fine because in the end of the day, a lot of businesses, if you’ve been building it up your entire life and you’re coming up to retirement, then on average of mine, it’ll be worth half a mil anyway, or a mil, unless you’ve taken deliberate action to actually get that value up.

That’s something we’re experts at doing, by the way. So if you do want to find out about things you can do to increase the value of your business, then get in touch.

But one of the other things is yeah, apart from the lowering of the restriction to a million pounds, there’s also another restriction about what you can do in the same industry and line of work. So when you claim entrepreneur’s relief, you are not allowed to work in the same industry for two years after paying that entrepreneur’s relief. It might sound a bit mad. In some ways it is because, if you’ve got someone who’s good at building businesses and then selling them, that’s great for the economy. So why wouldn’t you want them to do it again, straight away?

But, the real reason behind that is, it stops people just building up a business and selling it, or winding it down, getting all the money out of the business, using the entrepreneur’s relief rate, and then setting up another business. So it’s aimed more exit strategy or a mini retirement, rather than something you can do on a regular basis to avoid paying lots of tax.

So those are the two main restrictions. There’s a few other things. And, if you own part of a business, then you may be eligible for it. So, there’s quite a few other conditions, as well.

But it’s a great relief. And it comes from the days when the government used to promote the growth of small business, rather than try and stifle. Hopefully, it’ll still be there a few years down the line. They’ve already reduced it from 10 million of relief to 1 million. So, I can’t imagine them revoking it all together, because it is still a really important relief out there, which encourages the one man bands to go out and actually hire staff and build things up. So it’s great for the economy.

But what I’m trying to say, ultimately, is if you want to build up your business so it’s worth something, so you can sell it and you can claim that entrepreneur’s relief, get in touch. Book yourself in for a free strategy session. We’ll help you understand what your business is worth today. And then, we’ll give you a strategy to actually increase the value of that.

So have a great day. Get in touch. Remember to like, share, follow, and subscribe. And I’ll see you at the next video.

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  • The ONE thing you MUST do if you’re serious about exiting on a high
  • The tried and tested model you must implement NOW to lock down a high-value business sale later

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