Entrepreneurs’ Relief (ER) was introduced in 2008 and provides a very generous 10% rate of capital gains tax (compared to 28% for a higher-rate taxpayer) on the disposal of a ‘business’ provided certain strict conditions are met.
ER Qualifying Disposals
Entrepreneurs’ Relief is available in the following circumstances:
- A disposal of the whole (or part) of a sole trader business carried on for at least a year up to the sale
- A disposal of the whole (or part) of a trading partnership business or partnership share provided it has been owned for at least a year up to the sale
- A disposal of shares in a trading company by an officer or employee holding at least 5% of the ordinary shares providing the shares have been held for at least a year prior to disposal
- A disposal of an asset previously used in a business carried on by a sole trader where the asset disposal takes place not more than 3 years after the cessation
- A disposal by a former partner of an asset previously used in a business carried on by a partnership of which he was a member where the asset disposal takes place not more than 3 years after the cessation of the business
Part Disposals Qualifying for ER
Although the disposal of a ‘whole’ business is normally clear cut, difficulties can arise in practice in determining whether the disposal of ‘part of a business’ qualifies for Entrepreneurs’ Relief.
Broadly, a part disposal only qualifies provided a ‘material disposal’ has occurred otherwise any capital gain arising will be subject to CGT at the normal rates of 18% and/or 28%. This generally means that the part disposed must be a ‘stand alone’ part of the business thus preventing Entrepreneurs’ Relief being claimed on the piecemeal disposal of individual business assets.
To determine whether a particular situation qualifies for ER the circumstances of any planned part disposal needs to be carefully considered, including the relevance of past tax case law.
Changes to ER from 18 March 2015
For disposals on or after 18 March 2015 HMRC have closed two pre-existing loop holes and have identified specific circumstances where ER will be denied unless certain conditions are met:
- Associated Disposals ~ Entrepreneurs’ Relief will only be available on privately-owned business assets where they are associated with a material disposal by the individual i.e. a disposal of at least a 5% shareholding in the company or at least a 5% share in the assets of a partnership carrying on the business.
- Joint Venture Disposals ~ Entrepreneurs’ Relief will only be available on gains on shares which invest in joint venture companies provided the investing company is a trading company in its own right (or the holding company of a trading group).
Planning for Disposals
The disposal of a part of a business or associated disposals where it is subsequently discovered that it does not qualify for Entrepreneurs’ Relief could prove to be an expensive mistake and will result in a significant amount of additional CGT having to be paid.
Therefore careful advance planning relating to any business disposal is absolutely essential and professional advice should always be taken prior to committing to any contractual arrangements for a sale. This will help to ensure that most business disposals will qualify for Entrepreneurs’ Relief.
If you would like to discuss the content of this article or you require advice on the disposal of an unincorporated business or business shareholding then please do not hesitate to email us at firstname.lastname@example.org or ring us on 01633 215 544