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Entrepreneurs’ relief and associated disposals

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18 October 2016

The government seem intent on tweaking the entrepreneurs’ relief (ER) rules at every opportunity.

In particular, the associated disposal rules have been targeted in recent times but with some unintended consequences. We look at the change in rules, what this means and the latest position.

What is an associated disposal?

This is where a property (or other business asset) is held outside of a partnership or company by a partner or shareholder and is subsequently disposed of following a disposal of all or part of a partnership share/shares in the company. ER can normally be claimed on an associated disposal, resulting in a 10% CGT rate, providing certain conditions are met.


1.Minimum 5% share in the business

From March 2015, the partnership interest or company shareholding disposed of must constitute at least 5% of the business. Previously the legislation had referred to a ‘material disposal’ but this had no definition.

The associated disposal should be carried out as close to the partnership/share disposal as possible; however, HMRC do accept that there could be some delay, for example, to allow for the property to be marketed and sold. If an individual had made a share or partnership disposal prior to 18 March 2015 of, say, 2% and were now looking to dispose of the property, they would not qualify for ER on the basis that under the new rules there was not a material disposal.

2. Three year period of ownership

In 2015 some anti-avoidance provisions were also introduced. These changes had some unintended consequences for certain commercial deals, which HMRC confirmed it had not been their intention to affect. The March 2016 Budget, therefore, introduced some further changes to deal with this. However, along with these changes, they have also sneaked in a new ownership requirement.

Previously, to claim ER on an associated disposal, the land had to be owned and used in the business for a period of at least 12 months. Under the new rules this period of ownership has increased to three years.

After representations from professional bodies and advisors a further amendment has since been made to the Finance Bill such that the three year ownership period only applies to assets acquired on or after 13 June 2016. Therefore, our current understanding is that if the asset disposed of was acquired before this date, they will only be subject to a 12 month ownership period.

What's next?

Until the Finance Bill is passed, there remains some uncertainty; however, this is expected imminently. If you hold a business asset outside of your company/ partnership and are looking to dispose of the asset, it is advisable to check your tax position first to ensure that you are not hit with a higher tax bill than expected.