Qualifying for entrepreneurs’ relief
Entrepreneurs’ relief has replaced business assets taper relief as a way of reducing capital gains tax (CGT) on certain business disposals.
But the two reliefs are very different in a number of important respects. In particular, the qualifying conditions for entrepreneurs’ relief are much more restrictive, so you will need to take care to make sure a disposal qualifies.
Entrepreneurs’ relief reduces up to £1 million of gains by 4/9ths. Since the CGT rate is now 18%, this results in qualifying gains being taxed at an effective rate of 10%. Relief is available only on material disposals. For a sole trader or partner, this is the disposal of all or part of their interest in the business, or of business assets within three years after the business has ended.
A shareholder can qualify for relief on the disposal of shares in their personal company. This is a company in which, for at least a year ending with the date of the disposal, the shareholder has been a director or employee, and has owned at least 5% of the ordinary share capital carrying at least 5% of the voting rights. The company must be a trading company or the holding company of a trading group.
Once you have made a material disposal, you may be able to claim relief on an associated disposal as well. This is a disposal of assets, such as premises, that you owned personally but were used for the business for at least a year ending with the material disposal.
But there are some extra conditions for associated disposals. The one most likely to cause difficulty is that relief is restricted where the owner received rent from the company or partnership for use of the asset. The relief is reduced by reference to the proportion of market rent charged over the whole period of ownership of the property. For business taper relief, it did not matter if rent was charged. The problem is that if you have a mortgage on the property it is generally tax-efficient to charge rent so that you can claim tax relief for the interest. You must also be withdrawing from involvement in the business. So, for example, you cannot claim entrepreneurs’ relief on the sale of a property used by your company if you remain a director or employee.
There are other conditions that operate over the whole period of ownership, so you need to put the optimum arrangements in place now.