Where an individual personally owns a property, outside of a business, that is used in a partnership or limited company of which they are either a partner or shareholder, they may be eligible for entrepreneurs’ relief on any subsequent disposal.
Entrepreneurs’ relief allows a gain to be taxed at 10% as opposed to 28% providing certain conditions are met, including:
- The disposal must occur at the same time or shortly after a reduction in the partnership share or shareholding in the company.
- The disposal must be made as part of a withdrawal from the business.
- The property must have been used in the business for at least a 12 month period.
It should be noted that the rules are different in respect of disposals of property held within an unincorporated business as part of the cessation of the business, which is not covered within the scope of this article.
There are a number of provisions which could reduce the relief available on a disposal of a property held outside the business in which it is used. The two most common are where there is an element of non-business use and where rent has been received post 6 April 2008.
1. Period of non-business use – if the property has not been used by the business during the whole period of ownership by the individual, then the relevant proportion of non-business use time will not be eligible for entrepreneurs’ relief. For example, say a property has been owned by an individual for 20 years but only used in the business for 10 years, if the gain on disposal was £100,000 only £50,000 of that gain would be eligible for entrepreneurs’ relief.
2. Rent received post 5 April 2008 – if any rent is paid by the business to the individual for the use of the property after 5 April 2008 a restriction will also apply. This will be dependent upon the rent received compared to the market value rent for the property. For example, if rent equated to 50% of the market value, only 50% of the gain would be eligible for entrepreneurs’ relief. Consequently, if a commercial rent (or higher) is received, no entrepreneurs’ relief will be available for the period the rent is paid (post April 2008).
A full history of the property’s use is essential to determine the potential entrepreneurs’ relief available at the lower 10% rate. Too often, this is overlooked and disappointment can occur when the tax charge ends up being higher than expected.
There are opportunities to plan around such restrictions and in certain cases cancel them out altogether. However, it very much depends on the fact pattern of each situation and advance planning is key. Best practice is to consider the position and structuring as far as possible in advance (but at a minimum 12 months) of a disposal to ensure the best tax result.
If you would like further advice on this, please do get in touch with Andrew Brookes.