John Davison explains how entrepreneurs’ relief is applied.
Entrepreneurs’ relief is one of the most useful reliefs from Capital Gains Tax (CGT) for businesses. It applies to assets that meet the qualifying conditions throughout the one-year qualifying period up to the date of disposal or the date when the business ceases. This is subject to a lifetime limit of £10 million for disposals on or after 6 April 2011 (lower limits applied prior to this date). Husbands, wives and civil partners are all separate individuals and each are eligible for the lifetime limit.
Who can claim the relief?
The relief is only available to individuals and some trustees of settlements. It is not available to companies nor personal representatives of deceased persons nor trusts where the trust is entirely a discretionary settlement.
Assets eligible for relief
Assets used in an individual’s business or partnership (but excluding some assets such as goodwill and shares and securities) that are part of the disposal of all or part of the business.
Assets used in an individual’s business or partnership that have been disposed of within three years after the time the business ceased.
Shares or securities in an individual’s personal company that are disposed of while it is a trading company (or where holding company shares are disposed of, the group is a trading group) or within three years from the date the company ceased to be a trading company of a trading group.
This includes assets held personally by the individual used in the businesses. Businesses include most business other than property letting, although furnished holiday lettings in the UK or European Economic Area are included.
The relief is not available where assets of a continuing business are sold, unless it is the disposal of a part of a business. The relief is not available on goodwill where there is a disposal to a close company in which the individual or a connected person owns 5% or more of the share capital. A close company is one that is controlled by five or fewer participants.
To qualify for the disposal of shares or securities it is necessary to be an officer or employee of the company. A company is a personal company where at least 5% of the ordinary share capital is held that gives at least 5% of the voting rights in the company. It should also be noted that there are also restrictions where the company holds shares in joint venture companies or is a member of a partnership.
The rules differ slightly for assets held by trusts, but the relief is only available where there is an individual with a life or absolute interest in possession under the trust, or under the part of a trust that includes the property in question. Where a trust is involved it is prudent to get further advice.
HMRC has provided examples of where the relief applies. A simple example is, an individual sells its business that it had owned for the past 10 years. The following gains were made.
The business was sold to an unrelated business and the net gain of £1.5 million is eligible for Entrepreneurs’ Relief. The gain on the shares will also be eligible for the relief if the conditions for shares are also met.
These are to be made on the first anniversary of 31 January following the end of the tax year when the disposal has taken place. For example, if the disposal is made in the tax year ending 5 April 2016 a claim is to be made by 31 January 2018. Claims by individuals are to be made on their individual tax return. A claim by trustees of a settlement must be made jointly with the qualifying beneficiary and the claim is to be made using the Claim for Entrepreneurs’ Relief form.
Who is this useful to?
This relief is useful to all businesses at any time in their business cycle. When businesses are starting it is advisable to ensure that the business is structured to ensure that the relief will be available. When the owner is considering disposal it is necessary to ensure that all the qualifying conditions are met to ensure the relief is available. The relief is especially useful to individuals, but some trusts can also benefit, but the conditions for relief need to be examined carefully. This is a complex provision and is worthwhile getting early advice to ensure all conditions are met.
Another useful relief
Roll-over relief is also another useful business CGT relief. It allows any CGT on an asset to be deferred when another business asset is purchased. The gain from the disposal of the asset is rolled over into the new asset and this CGT is paid when the new asset is sold. For example, a business sells an asset for £100,000 and makes a gain on purchase of £10,000. A new asset is purchased for £150,000. The £10,000 gain is rolled into the new asset and its value for CVT purposes is reduced to £140,000.
Last reviewed 21 May 2018