Entrepreneurs’ Relief is an extremely valuable tax relief. But, it is an “all or nothing” relief and easy to fall foul of the qualifying criteria. However, planning can often be put in place to ensure that the capital gain arising on a disposal qualifies for the relief.
How does the relief work?
The relief can reduce the Capital Gains Tax payable on the sale of a business (or interest in a business) and related assets to a rate of 10%, from a rate of 28%. Each individual currently has a lifetime limit of £10 million of gains of qualifying disposals, therefore the relief can be worth up to £1.8 million to an individual. There is a qualifying period of 12 months for the relief.
Land based businesses and Entrepreneurs’ Relief
The relief is designed to be available on the sale or disposal of a business, which does not usually happen with a farming business, where assets are usually sold. In many areas of the UK property developers and house builders are showing interest in acquiring areas of land which can be developed in the near future. Therefore, where a landowner is contemplating selling a block land for future development, the availability of Entrepreneurs’ Relief can significantly reduce the tax payable. Similarly, where a building plot or farm buildings for conversion are to be sold, or land is to be sold to another farmer in the still buoyant market for farmland.
Possible tax planning
Where assets used in a business are sold at around the same time as a qualifying business is disposed of, the capital gains on the assets should also qualify for Entrepreneurs’ Relief, if matters are structured correctly. In a farming context, the transfer of a partnership share or shares in a farming company, to another family member, can qualify as a disposal eligible for Entrepreneurs’ Relief. Farmland used in the business which is sold at the same time as the transfer of the business interest can also qualify for Entrepreneurs’ Relief if structured correctly.
Where a market rent has been paid to a landowner for the use of land that is to be sold, this can restrict the availability of Entrepreneurs’ Relief. However, planning may be possible to "wash out" any restriction, if sufficient time exists before a disposal.
Ensure you qualify where possible
Although Entrepreneurs’ Relief is not ideally suited to farming businesses, tax planning is often possible to ensure that a sale of valuable assets can qualify for relief and reduce any associated tax liability significantly. However, with a qualification period of 12 months for the relief, individuals contemplating a future disposal of land should consult with their tax advisers well in advance of a disposal, to allow sufficient time to implement any planning required to maximise available relief.
If you would like to discuss tax planning in relation to Entrepreneurs’ Relief, or any other tax planning issues, please contact Nick Dee or Peter Griffiths on 01242 680000 or e-mail firstname.lastname@example.org or email@example.com.