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Entrepreneurs’ Relief: ‘Harvesting’ Development Profits

Shared from Tax Insider: Entrepreneurs’ Relief: ‘Harvesting’ Development Profits
By Chris Williams, October 2014
Chris Williams explains how to sell business assets, such as farmland for development, and benefit from entrepreneurs’ relief. 

One of the problems that entrepreneurs’ relief (ER) can present to a continuing business is that if you sell an asset, as opposed to part of the business, you can’t claim ER on the disposal and can face paying 28% CGT as a result.

ER is only available in such circumstances if:

  • a sole trader sells all or part of the business or assets after the business has ceased;
  • a partner disposes of all or part of their share of the business, or an asset after making such a disposal; or
  • a shareholder disposes of shares, or an asset used in the business, again, after making such a disposal.

Let’s look at how this works in practice:

 

Example: An opportunity too good to lose?

 

Farmer Keith owns two 40-acre fields, bought years ago for their agricultural value of £2,500 per acre. Blueline Builders obtain planning permission for a housing development on one of the fields and offer him £5 million for it. If he simply sells them the field he will not get ER and pay 28% CGT on £4.9 million, £1,372,000, whereas if he could get ER the tax bill would ‘only’ be £490,000.

 

If Keith was intending to retire anyway he could cease farming and dispose of the development land after cessation (he would not have to dispose of any other assets: he could cease trading and keep the remaining land for other purposes, such as leisure, just not farming.) He must not keep the business going in any shape or form that is identifiable with the existing business. If he doesn’t cease trading before selling, he doesn’t meet the conditions for ER.

 

Therefore if the offer came in and the developer wanted an agreement before the harvest was in, Keith would have to decide whether it was really worthwhile hanging on until the harvest. He could not, for example, sell the land and lease it back in order to obtain the harvest, as that would mean there was no cessation of business.

 

Creating the conditions for ER

If Keith wants to continue in business he needs to dispose of all or part of the business. This could be to his wife, another family member or a company set up for the purpose.


A disposal to a spouse or other relative has to give them a share in the business, but they don’t have to acquire a major share. Keith can make his wife a partner with as little as a 1% share in the business and he doesn’t even have to put any of the land into the partnership (though he should consider doing so as land used by the business but owned personally only attracts 50% IHT business property relief).


Making his wife a partner is a disposal of that 1% share in the business and enables Keith to claim ER on selling the land, but only after he has completed all the formalities of making his wife a partner.


If there is no individual to share the business with, Keith can set up a company to take on a share in the business instead. The company could be a partner with Keith or he could transfer the continuing business to the company to run the business, with or without the land he wishes to retain, and then sell the development land afterwards.


Practical Tip:

If you expect to make a gain that will use up your £10 million ER lifetime allowance, you can share the business with a spouse or relative and let them use their ER allowance as well. But this isn’t last minute planning; they will have to own their share of the business for a year too.


Chris Williams explains how to sell business assets, such as farmland for development, and benefit from entrepreneurs’ relief. 

One of the problems that entrepreneurs’ relief (ER) can present to a continuing business is that if you sell an asset, as opposed to part of the business, you can’t claim ER on the disposal and can face paying 28% CGT as a result.

ER is only available in such circumstances if:

  • a sole trader sells all or part of the business or assets after the business has ceased;
  • a partner disposes of all or part of their share of the business, or an asset after making such a disposal; or
  • a shareholder disposes of shares, or an asset used in the business, again, after making such a disposal.

Let’s look at how this works in practice:

... Shared from Tax Insider: Entrepreneurs’ Relief: ‘Harvesting’ Development Profits