This week on Wealthy Wednesday, I’m going to be sharing some of my top tips on wealth strategies for sole traders claiming entrepreneurs relief. If your business has stopped trading and you’re selling its assets, does this mean you cannot claim?

Business assets

If or when you sell your business, you should clearly aim to get a good price for it. The problem is HMRC will get wind of this and take a chunk of anything you make in your capital gains tax (CGT).

However, there is some good news for you.

If you successfully apply for entrepreneurs’ relief (ER) the tax rate is just 10% and so the chunk doesn’t need to be big. This relief can also apply to assets you personally owned and used in your business. If your business was a company or partnership then these are known as “associated assets”. Plus there are special rules that set time limits and other restrictions on this. However, these don’t apply to assets sold by sole traders.

Sole Trader Time Limits

Instead of the associated assets rules a general time limit applies. This allows sole traders ER where the gain from selling their business (and personally owned assets used by it) traded for at least twelve months up to the time of sale.

On that basis it appears that if you do not sell the assets at the time you end trading you’ll lose ER for them. However, other rules come into play.

ER available

Where there’s a gap between cessation of trading and the sale of the assets HMRC says that you can claim ER as long as:

  • the business had been carried on for at least a year; and
  • the assets in question were being used by it when the business ceased trading.

Planning point. It’s vital that you can show HMRC that the assets were still in use by the business at the time it ceased. If you can’t it may challenge your claim for ER.

Tip. Unlike associated assets rules there’s no restrictions on how an asset can be used between the date you stop trading and its sale. For example, you could let it out, leave it vacant or even use it in an entirely new trade.

Example. After several years of trading as an optician James ceases and converts the premises to a coffee shop. It proved a very successful move and after a few months he received an offer for the business including the premises. Any gain he makes from selling the new business won’t qualify for ER because it hasn’t traded for twelve months, but as the premises was used in his previous business, and the sale occurs within three years of it ceasing to trade, he can claim ER on the whole of the gain.

Succession

There’s a further wrinkle in the ER rules. Even if gains from the sale of a business don’t qualify for ER because the twelve-month trading condition isn’t met, the later sale of assets used in the business might. This is because it’s only necessary to consider the twelve-month qualifying period by reference to the date the trade ceased (see The next step ).

Tip. In order to put beyond doubt any ER timing issues, ensure the sale of your business takes place only after it has been trading continuously for at least twelve months. It might be worth dragging out a loss making trade just to ensure the twelve-month condition is met.

As a sole trader you can claim entrepreneurs’ relief on gains made from the sale of assets up to three years after the business stopped trading. What’s more, an asset, e.g. trading premises, can be used for any purpose, e.g. let out, during the three-year period and ER won’t be lost.