Further tightening of entrepreneurs relief rules

Published: Friday 22 January 2016

As covered in our last Health & Care Focus, the December 2014 Autumn Statement included the unexpected announcement that the disposal of goodwill to a company related to the vendor would no longer qualify for capital gains tax entrepreneurs’ relief.

The Chancellor surprised again in the March Budget with two new measures, effective immediately, to further restrict the availability of entrepreneurs’ relief on disposals of business assets. This will have the effect of increasing the capital gains tax payable on certain disposals from 10% to the main rate of 28%.

We consider one of these new measures in detail below which would apply to the disposal of assets held outside of the care business.

The rules on claims to entrepreneurs’ relief have been tightened in respect of disposals of assets, held personally by an individual, but used in the trade of their partnership or company. An example of this would be a care operator trading via a company structure but with the care home property held personally.

Subject to certain conditions, it is possible to claim the 10% entrepreneurs’ relief rate of tax on such disposals, where they are associated with a full or partial withdrawal from the care business itself. Withdrawal from the business was not previously defined, leaving open the possibility of a claim to entrepreneurs’ relief on asset disposals at the same time as a very small reduction to an individual’s shareholding or partnership share.

To ensure that entrepreneurs’ relief is only available where an individual has genuinely withdrawn from a business, it is now only available on disposals of personally held assets where they accompany a disposal of at least a 5% shareholding in a company or at least a 5% share in the assets of a partnership.

As the rules have started to bed in we have found that this change could adversely impact some genuine commercial deals. Anti-avoidance rules have also been introduced alongside the change such that there can be no arrangements for the purchase of connected shares following the disposal. Therefore, if shares were issued by an unconnected purchaser of the care business to the vendor as part of a commercial deal they would be within the new rules.

In the example above, the sale of the shares themselves would still be eligible for entrepreneurs’ relief, but if any disposals of assets such as a property held outside of the company or partnership are planned at the same time, relief may not be available and the capital gains tax liability could be up to 18% higher.

Although HMRC have confirmed that the rules had not been drafted to catch such commercial transactions, the rules as they stand are unchanged. There may, however, be ways to plan around these unintended consequences and we can provide further advice on this if you think you could be affected.

In summary, if you are looking to sell a business or assets associated with it, we would recommend that the tax implications are considered early on.