Entrepreneurs’ Relief legislation was introduced with effect from 6 April 2008 and reduces the rate of Capital Gains Tax (CGT) payable on capital gains on “qualifying business disposals” to 10%. The relief is available to individuals and qualifying beneficiaries of certain trusts.
Initially, each individual had a lifetime limit of qualifying capital gains of £1 million, and the top rate of CGT was 18%. Hence, the maximum lifetime benefit from the relief was initially £80,000 of tax for each individual. Currently, the lifetime limit is £10 million of qualifying capital gains, and the maximum rate of CGT is 28%. Hence, the maximum lifetime benefit from the relief is currently £1.8 million for each individual; husband and wife each have their own lifetime limit. Therefore, if a married couple are in business together, the combined potential maximum lifetime benefit is currently £3.6 million.
The current significant tax benefit of the relief means that, wherever possible, individuals should be looking to structure the sale of businesses and assets to ensure that the relief is maximised. Failing to do so can be costly in terms of additional tax.
We have set out below an outline of the qualifying conditions for the relief and examples of tax planning to maximise the relief. These include some real life cases.
Qualifying conditions for the relief
If the qualifying conditions are met, the following disposals will qualify for the relief:
- A disposal of all or part of a business that the individual has owned for at least a year.
- A disposal of assets that were in use for the business when the business ceased (if the individual owned the business for at least a year, and the disposal is within three years of cessation).
- A disposal of shares or securities in a trading company.
- A disposal of assets owned personally and used in a partnership or company, where the individual simultaneously reduces their interest in the partnership or shares of the company (“associated disposal”).
For Entrepreneurs’ Relief, a partner in a partnership is treated as though he is in business on his own account. Therefore, a disposal of part of their interest in the partnership is treated as a disposal of part of a business.
Where shares or securities of a trading company are sold, the individual must hold at least 5% of the ordinary share capital and voting rights and be an employee or officer of the company, for at least one year to the date of disposal.
For associated disposals, there is a restriction in the available relief in certain circumstances. These circumstances include if the assets disposed of are in use for the business for only part of the period of ownership, or rent has been received in respect of the assets since 6 April 2008.
As the qualifying conditions indicate, the relief is designed for the sale of a business, or part of a business, or the cessation of a business, and not for the “standalone” sale of assets. This is not ideal for farming businesses which tend to be passed to the next generation, but often the sale of an asset used in the business will occur e.g the sale of land for development.
With careful planning it can be possible to structure a transaction to be eligible for Entrepreneurs’ Relief, even where the sale of land for development takes place and the farming business continues. This is illustrated in the examples below.
Examples of tax planning to maximise the relief
An individual farms as a sole trader and is to sell land and buildings for development for £5 million, but continue farming. Unless the sale can be regarded as a separate part of the business, for example the arable farming part and dairy farming is to continue, Entrepreneurs’ Relief will not be available on the disposal.
An individual farms as a sole trader and is to sell land and buildings for development for £5 million. He ceases trading as a sole trader and transfers his farming business to a limited company.
Entrepreneur’s Relief will be available on the disposal of the land and buildings, if they are sold within three years of ceasing to trade as a sole trader. The transfer to the limited company would be regarded as a qualifying cessation.
A husband and wife farm in partnership. All of the land and buildings farmed are owned personally by the husband outside of the partnership. A sale of part of this land for development for £5 million, with the partnership continuing to farm, would not qualify for Entrepreneurs’ Relief.
Entrepreneurs’ Relief could be obtained if the partnership business was transferred to a limited company as in Example B. However, there are often other tax reasons for not transferring a farming partnership to a limited company.
Alternatively, Entrepreneurs’ Relief could be obtained as an associated disposal, if the husband transferred part of his interest in the partnership (say 5%) to one of his children, and then sold the land for development shortly thereafter.
A husband and wife farm in partnership as dairy farmers and have for five years diversified and run a cheese making business as a limited company. Each owns 50% of the ordinary share capital, but only the husband is a Director and employee of the company.
An offer is received for all of the shares of the company for £5 million. The husband would be able to claim Entrepreneurs’ Relief on the sale of his shares but the wife would not qualify
If the wife transferred all of her shares to the husband shortly before sale and the husband sold 100% of the share capital, he would obtain Entrepreneurs’ Relief on all of the capital gains on all of the shares, as he has fulfilled all of the qualifying conditions for one year before sale.
Entrepreneurs’ Relief is a valuable relief and planning is required to ensure that the relief is maximised for disposals. However, as the relief generally has a qualifying period of one year, clients should be speaking to their advisers regarding possible disposals at least one year before a sale is to take place. This is to ensure that there is adequate time to put in place any planning required to maximise the relief.
If you have any questions regarding tax planning to maximise the available Entrepreneurs’ Relief, or would like to discuss any other tax planning issues, please contact Peter Griffiths or Nick Dee on 01242 680000.
Entrepreneurs’ Relief presentation
We are planning to hold a presentation on Entrepreneurs’ Relief in early October for other Agricultural professionals, when we will outline tax planning to maximise the available relief, including cases we have dealt with.
If you would like to receive an invite to this presentation, please click here.