Jennifer Adams outlines some of the rules that must be satisfied in order that a claim for capital gains tax entrepreneurs’ relief can be made.
Entrepreneurs’ relief (ER) has been in place since 2008. Rather than being a ‘relief’, it is in fact a special rate of capital gains tax (CGT) applying to gains realised by individuals on the disposal of certain qualifying ‘business assets’ where it can be shown that those assets have been realised on the disposal of all or part of a business (or where the asset disposal is shortly after the cessation of the business in which it was used).
In addition, ER can be claimed on gains realised on the disposal of shareholdings in trading companies (and shares in certain holding companies), but only where specific conditions are satisfied. The relief is not available to reduce the corporation tax payable on gains made by companies. It does not matter where the business is carried on; the important point is that the taxpayer is liable to CGT on gains arising on the disposal of the business assets.
‘Business assets’ may include a shareholding in another company and, in the case of an unincorporated business, include goodwill.
Conditions
An ER claim can be made only in respect of a capital gain arising on what is referred to as a ‘material disposal of business assets’ (TCGA 1992, s 169I). Just because there has been a disposal of business assets does not by itself give rise to entitlement to relief, as other conditions must be met which depend upon the nature of the disposal made.
Broadly a ‘material disposal’ is a disposal by an individual of:
- the whole or part of an unincorporated business (that has been owned by at least twelve months);
- assets in use in the business when the business ceased (provided that the business was owned for at least twelve months up to the date of cessation and the disposal takes place within three years of that date); or
- a disposal of a company’s shares or securities (where certain conditions are satisfied, which are not considered in this article).
Additional points:
- As regards assets disposed of not later than three years after the taxpayer ceased to carry on an unincorporated business, there is no restriction as to the use of the asset subsequent to the cessation date.
- There are other criteria that need to be satisfied in order that an ER claim may be made on certain ‘associated’ disposals of assets. ER applies on such disposals broadly where there has been a material withdrawal by the individual from participation in the company or partnership. ‘Material’ in this case means a disposal of five per cent or more of the voting share capital and following FA 2015, the company must be a trading company in its own right, no account being taken of activities carried on by any joint venture companies that a company is invested in, or of any partnerships of which a company is a member. The seller must be an officer or employee of the company or of another group company. It is only the shares beneficially owned by that individual that can be taken into account in satisfying this condition. For joint shareholdings, the shares (and voting rights) are treated as being owned in accordance with each joint owner’s underlying beneficial ownership (TCGA 1992, s 169S(4)).
- Lifetime limit - an ER claim is subject to an overriding limit relief claimable by any one individual (or surrendered by him to a trust in which he has an interest in possession) referred to as the taxpayer’s ‘lifetime allowance’, currently £10 million.
‘Part of a business’
It may be difficult to determine whether an asset disposal arises in connection with the disposal of ‘part of a business’. To date there have only been a handful of tax cases heard concerning ER, and two of those were brought to decide whether ‘part of a business’ had been sold.
Both cases used the earlier case of McGregor v Adcock [1977] STC 206 as a precedent. The McGregor case was brought under the old CGT retirement relief legislation (from which the wording of the ER legislation was largely drawn), and concerned a farmer (Mr Adcock) who sold five acres of his 35 acre farm for development, continuing to work the remaining 30 acres. The taxpayer argued that farming was different from any other business in that it consisted of occupying land, and a disposal of land was thus a disposal of part of the business. Mr Adcock lost the case, failing to convince the court either that farming was different from any other business or that a part disposal of a business had taken place.
The case of Gilbert t/a United Foods v CIRC [2011] UKFTT 705 (TC) was almost identical relating to the sale of 16 acres of a 53 acre farm, but in this case Mr Gilbert was not involved in agriculture. Evidence was produced showing that he had disposed of part of his business and as such was entitled to claim ER.
In Russell v CIRC [2012] UKFTT 623 (TC), Mr Russell was a one-third partner in a farming business, run with his brother and sister-in-law. Land disposed of by the partnership was agreed as being 35% that was capable of being farmed. Mr Russell made a claim for ER on the basis that the sale was a ‘material disposal of a business asset’. The main argument was that as there had been a fall in profit after the land was sold and as the land sold was being farmed, then it followed that part of the business had been sold.
The tribunal did not agree, finding that the sale was of a business asset not ‘part of a business’. The reasoning behind this decision was that the business was being run in exactly the same way after the sale as it had been prior to disposal. Mr Russell may have succeeded in his claim if he had sold part of his partnership share, as that would have allowed the land to be an ‘associated disposal’ (under TCGA 1992, ss 169K, 169P). Inter alia, the ‘associated disposal’ provisions relate to partners disposing of one or more assets owned personally by them (i.e. owned outside the partnership) at the same time as they are disposing of all or part of their interest in the partnership. Incorporation could have also been used as a means of cessation of the partnership business, thus also allowing a claim to be made.
Practical Tip:
ER is not automatic. It must be claimed within the statutory time limit, which is on or before the first anniversary of the 31 January following the tax year in which the disposal in question takes place (TCGA 1992, s 169M(1)).
