Entrepreneurs’ relief has replaced business
assets taper relief as a way of reducing capital
gains tax (CGT) on certain business disposals.
But the two reliefs are very different in a
number of important respects. In particular, the
qualifying conditions for entrepreneurs’ relief
are much more restrictive, so you will need to
take care to make sure a disposal qualifies.
The change stems from the announcement in
the Entrepreneurs’ relief reduces up to £1
million of gains by 4/9ths. Since the CGT rate
is now 18%, this results in qualifying gains
being taxed at an effective rate of 10%. Relief
is available only on material disposals. For a
sole trader or partner, this is the disposal of all
or part of their interest in the business, or of
business assets within three years after the
business has ended.
A shareholder can qualify for relief on the
disposal of shares in their personal company.
This is a company in which, for at least a year
ending with the date of the disposal, the
shareholder has been a director or employee,
and has owned at least 5% of the ordinary
share capital carrying at least 5% of the voting
rights. The company must be a trading
company or the holding company of a trading
group.
Once you have made a material disposal, you
may be able to claim relief on an associated
disposal as well. This is a disposal of assets,
such as premises, that you owned personally
but were used for the business for at least a
year ending with the material disposal.
But there are some extra conditions for
associated disposals. The one most likely to
cause difficulty is that relief is restricted where
the owner received rent from the company or
partnership for use of the asset. The relief is
reduced by reference to the proportion of
market rent charged over the whole period of
ownership of the property. For business taper
relief, it did not matter if rent was charged. The
problem is that if you have a mortgage on the
property it is generally tax-efficient to charge
rent so that you can claim tax relief for the
interest. You must also be withdrawing from
involvement in the business. So, for example,
you cannot claim entrepreneurs’ relief on the
sale of a property used by your company if you
remain a director or employee.
There are other conditions that operate over
the whole period of ownership, so you need to
put the optimum arrangements in place now.
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