Entrepreneurs’ Relief is a very valuable tax relief which can reduce the top rate of Capital Gains Tax (CGT) from 20% to 10%. However, there have been recent changes in the legislation which need to be considered in any planning to ensure that the relief is available.
Availability of Entrepreneurs’ Relief
The relief can reduce the rate of CGT on a capital gain to 10%. Each individual has a lifetime limit of capital gains eligible for Entrepreneurs’ Relief (ER) of £10 million. Therefore, potentially the relief is worth £1 million (£10 million x (20% - 10%)) to an individual during his/her lifetime. Husbands and wives each have their own lifetime limit.
The relief is only available for what are known as “qualifying business disposals”. An example of a qualifying business disposal would be where a farmer ceases farming and sells all of his business assets, including the land and buildings. To qualify for the relief, the farmer must have carried on the business for at least one year, and the assets must be sold within three years of the business ceasing. Assets on which ER is to be claimed should not be sold before the business ceases.
In the above example, the relief would be available to a sole trader or individuals in a partnership. The relief is also available to shareholders in a limited company and qualifying beneficiaries in the trust. If, in the case of a partnership, the land and buildings being sold are not partnership assets but are held outside of the partnership, and rent was paid to the individual owners for the use of the assets since April 2008, this will result in a restriction of ER and is known as an associated disposal.
Associated disposals can offer significant ER planning opportunities for partners in a partnership or shareholders in a company but also have many potential traps which can mean the relief is lost. They allow an opportunity to sell assets used in a farming business, claim ER and continue farming.
For a partner to qualify they must dispose of an absolute amount of at least 5% of their partnership interest and then shortly after sell land used in the partnership that they own personally outside the partnership. The 5% disposal could be a transfer to a family member, therefore may be part of succession planning.
Prior to the 2016 Budget, the land being sold had to be held outside of the partnership for a period of at least 12 months. However changes introduced in the 2016 Budget means that this holding period has been potentially extended to 3 years. Therefore, any individuals looking to sell land and claim ER as an associated disposal need to ensure that they meet the relevant criteria before entering into a transaction.
If you would like to discuss possible ER planning opportunities, please contact Nick Dee (firstname.lastname@example.org, 01242 680000) or Peter Griffiths (email@example.com, 01242 680000).