This is the second article in a short series dealing with Capital Gains Tax (CGT) and provides an insight into the key conditions and details of the following business asset reliefs:
- Entrepreneurs’ Relief
- Business Asset Gift Hold-Over Relief
- Replacement of Business Asset Rollover Relief
- Incorporation Relief
- Enterprise Investment Scheme Reinvestment Relief
It should be noted that the disposal of any business asset needs to be carefully planned to ensure all of the tax implications and conditions are fully appreciated and considered. It is strongly recommended that professional advice is sought prior to the disposal of any business or business asset.
Entrepreneurs’ Relief applies whereby certain qualifying gains are taxed at a special reduced rate of CGT of 10% relating to the following business disposals:
- The whole or part of a trading business (note however that an isolated business asset disposal does not qualify)
- Shares in a trading company where the taxpayer is an officer or employee and holds 5% or more of the shares
- Assets formerly used in a business following cessation of trading
There is a generous lifetime limit of £10 million gains that are eligible but note that qualifying assets must have been owned by the person making the disposal for at least 12 months prior to sale.
The relief must be claimed within 12 months of the 31 January following the end of the tax year in which the disposal is made.
Unlike other taxable gains the 10% ER rate applies irrespective of the taxpayer’s total taxable income (although any gains qualifying for ER must be set against any unused basic rate band in priority to non-qualifying gains).
Business Asset Gift Hold-Over Relief
Generally a gift of a chargeable asset is liable to CGT using the market value of the gifted asset in calculating the capital gain.
Where a qualifying business asset is gifted (for example, to adult children when handing down part or all of a family business) the capital gain arising at the date of the gift may be ‘held-over’ so that any gain is effectively frozen until the recipient eventually disposes of the asset. Hold-over relief is also available on the gift of shares in an unquoted trading company subject to several conditions being met.
Where a qualifying asset is sold at undervalue then only the non-realised part of the gain can be held over. The realised gain (i.e. the difference between the actual sale proceeds and the original cost) is chargeable to CGT immediately.
Gift relief is not available on non-business assets, such as most quoted shares, unquoted shares in investment companies and investment property which is gifted to another individual.
Note that special rules apply where assets are gifted between a husband and wife or civil partners.
Further details can be found in HMRC Help Sheet 295 accessible by clicking on the following link: http://www.hmrc.gov.uk/helpsheets/hs295.pdf
Replacement of Business Asset Rollover Relief
Where a business asset, such as land & buildings, goodwill or fixed plant & machinery is sold by an individual and replaced by another business asset, the gain can be ‘rolled-over’ against the cost of the replacement effectively freezing the gain.
The total gain arising can only be rolled-over where ALL of the proceeds are reinvested in the cost of the replacement asset. Where the proceeds are only partly reinvested then the shortfall will result in an immediate capital gain.
The relief is available where the ‘replacement’ asset is acquired within a period starting 12 months before and ending 36 months after the disposal of the asset being replaced.
Rollover relief is also available to limited companies on qualifying assets which excludes goodwill.
Where a sole trader or partnership business is transferred to a limited company as a going concern in exchange for shares, any capital gains arising can be held-over until the disposal of the shares.
Where part of the consideration is in the form of cash or loan notes, then a pro-rata part of the capital gains arising will become chargeable immediately, with the balance available for incorporation hold-over.
Incorporation relief is automatic unless an election is made to disapply the relief so that the capital gains become chargeable on incorporation but normally at the special Entrepreneurs’ Relief rate of 10%.
EIS Reinvestment Relief
Where any capital gain is invested in shares qualifying for the Enterprise Investment Scheme (EIS) the gain can be deferred with any CGT only becoming payable when the EIS shares are disposed of.
The relief is not automatic and must be formally claimed. The EIS investment must take place within a four year time period which runs from 12 months before to 36 months after the date the capital gain arose.
Note that an investor may specify an exact amount of reinvestment relief to be claimed, thereby leaving part of the original gain chargeable to CGT. This gain can then effectively be converted into a tax free capital gain by utilising any capital losses and/or annual exemption which happen to be available.