Entrepreneurs Relief - don't take it for granted

August 2014

The 10% capital gains tax rate afforded by Entrepreneur’s Relief is often the target when tax planning for the disposal of a business or shares in a trading company. For the relief to apply a number of qualifying conditions need to be met, however, all too often business owners/shareholders either assume the relief applies or leave it too close to the completion of the transaction to resolve any issues.

All business owners and company shareholders should periodically review their position with regards to this valuable relief, and advice should be sought as early as possible when any disposal, transfer or gift is being considered. Failure to do this could see capital gains tax being charged at the 28% rate rather than the desired 10% rate.

A recent tribunal case highlights the need for business owners to take advice in connection with their entrepreneur’s relief position before disposing of an asset or shares in a trading company. In this instance a taxpayer disposed of a property from where he had performed his business. In order to claim entrepreneur’s relief on the disposal of a single asset, the asset in question must have been used in the business, and the disposal of it must occur within 3 years of a “material disposal” (in most cases a sale of all or part of a business, or the cessation of a business).

In this case the taxpayer ceased operations from the premises in question and started a “new” business very closely linked to the “old” business. HMRC attempted to argue that the business in fact had not ceased and therefore entrepreneur’s relief could not apply to the disposal of the property as no material disposal had taken place. The taxpayer successfully argued that the business had ceased and that the sale of the property had occurred within 3 years of the cessation of the business.

Although the taxpayer won in this instance, the case highlights the need for tax advice in connection with entrepreneur’s relief. For business owners (sole traders & partnerships) if a disposal of business assets is envisaged on which a chargeable gain will arise, it is imperative to understand what constitutes a material disposal. It is also imperative to understand the position for assets held outside the business (perhaps individually by one of the partners) but used in the business. Failure to address these could result in a tax charge of 28% rather than the 10% afforded by entrepreneur’s relief.

For shareholders in trading companies, danger signals can include non-trading assets in the company (perhaps some property rental investments), having a shareholding of less than 5%, not owning the shares for less than 1 year, or not being an employee or office holder in the company. Again, failure to address these points risks a capital gains tax rate of 28%.

Our tax team provide proactive and commercial tax planning services in relation to asset and share disposals and can help you to plan a sale of business assets as tax efficiently as possible. 

In many cases if there is an issue with the availability of Entrepreneur’s Relief things can be done to rectify it. The message is don’t assume the relief will apply, and don’t leave it until the last minute to get it checked.

Please contact Graeme Davies at graeme.davies@mitchellcharlesworth.co.uk for more information.

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