Entrepreneurs’ relief (ER) reduces the rate of UK capital gains tax (CGT) to 10% on the disposal of qualifying business assets. It can produce tax savings worth up to £1m. We can help navigate the complex and restrictive rules to maximise your ability to claim this valuable relief.
Ordinary capital gains for individuals are currently taxed at 10%, 20% or 28% depending on the type of gain and whether your combined taxable income and gains together exceed the basic-rate income tax threshold. ER qualifying gains (up to a lifetime allowance of £10m of gains) are always taxed at a 10% rate.
ER can be claimed by individuals or jointly by a qualifying beneficiary and the trustees of a life interest trust. Corporate entities cannot claim ER. To qualify, the gain must fall within one of three tightly-drawn categories and other qualifying conditions must be also met in the period prior to disposal.
Which disposals qualify for ER?
ER applies to disposals of business assets, on the condition that the business is being carried on commercially with a view to profit. There are three main categories of disposal that qualify:
1. Material disposal of business assets
This category includes the disposal of:
- The whole or part of a business.
- Interests in assets used in a business at the time the business ceased.
- Shares or securities of a trading company (or holding company of a trading group).
- Relevant shares acquired through an Enterprise Management Incentive (EMI shares).
Two further conditions that must be met:
- The business assets must be held for a period of one year before ER is available. This may be the period ending with the date of disposal or the date of cessation of trade. In the latter case, the disposal must take place within three years of the cessation of trade.
- For disposals of shares or securities, there is generally a need to hold a direct or indirect interest in 5% of the ordinary shares and voting rights of the company, although there is no such limit for EMI shares.
There are two notable exceptions to the above conditions:
- For EMI shares, there is no 5% minimum interest limit and the period the EMI option was held prior to exercise can be included when considering the one-year holding requirement.
- It is anticipated that Finance Bill 2019 will include measures, taking effect from 6 April 2019, which may enable shareholders falling below the 5% threshold as a result of issuing new shares to retain entitlement to ER if appropriate claims are made.
2. A disposal associated with a relevant material disposal
There must be an ‘associated disposal’ connected with a ‘relevant material disposal’.
An ‘associated disposal’ is the disposal of an asset as part of the withdrawal of the individual from participation in the business. The asset must be:
- held personally by the individual;
- used for business purposes in either in the trade of the partnership or the company;
- held throughout the relevant one year period (increased to three years for disposals of assets acquired on or after 13 June 2016).
A ‘relevant material disposal’ is where, broadly speaking, an individual disposes of at least a 5% interest in shares/securities in a qualifying company or the whole/part of a partnership business. Relief is restricted where, for the whole or part of the period of business use, the availability of the asset was dependent on the payment of rent, or was not used wholly for business purposes.
3. Disposal of business assets of a settlement
Trustees can also benefit from ER when disposing of settlement business assets, but only if the beneficiary separately qualifies for ER and has an available unused lifetime allowance.
How can Smith & Williamson help?
The conditions to qualify for ER are strict and a number of refinements have been introduced to the legislation in recent Finance Acts, which in some circumstances limit the availability of the relief. We can give specialist advice to ensure the relief is correctly obtained where the conditions can be met and make recommendations for correctly structuring the business in cases where conditions are not currently being met.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.