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Capital Gains Tax

Capital gains tax: relief on disposal of a business (Entrepreneurs’ Relief)

As expected the Chancellor has confirmed that the proposed CGT changes will go ahead on 6 April 2008. Indexation and taper relief are being swept away and replaced by a new Entrepreneurs’ Relief. Many people will be worse off under the new rules and should check whether there is any action that can be taken by 5 April 2008 to improve the position going forward - time is of the essence.

Entrepreneurs’ Relief will be available to individuals and trustees in respect of gains made on the disposal (on or after 6 April 2008) of:
- All or part of a trading business carried on by an individual either alone or in partnership
- Assets of an individual’s or partnership’s trading business following the cessation of that business
- Shares in (and securities of) the individual’s personal trading company (or holding company of a trading group)
- Assets owned by the individual and used by his/her personal trading company (or holding company of a trading group).

The first £1million of any qualifying gains will be charged to capital gains tax at an effective rate of 10%, with gains in excess of this limit charged at 18%. This £1million limit is a “lifetime” limit, so claims may be made on more than one occasion. Disposals on or before 5 April 2008 will not affect this limit.

Where the new relief is available, it will reduce the gains on which relief is due by 4/9ths. Gains and losses arising on the disposal of a business are aggregated before the relief is applied. The net gains after relief are then charged at 18%, resulting in an effective rate of 10%.

Note that there is no minimum age limit for claiming Entrepreneurs’ Relief.  Also, the relief will be available where the relevant conditions are met throughout a qualifying period of one year.

Sole traders and partnerships

The relief applies to gains on the disposal of the whole or part of a qualifying business, as long as the individual has owned that business or has been a member of the partnership owning that business for a period of one year ending with the disposal. The disposal by a partner of the whole or part of his/her interest in the partnership also qualifies if the partnership carries on a qualifying business, and the individual meets the ownership test during the year ending with the disposal. If a qualifying business ceases, relief is available on gains on assets in use in the business at the time of cessation, provided they are disposed of within three years of the date of cessation.

A business will qualify if it is a trade, profession or vocation – this includes the commercial letting of furnished holiday accommodation.

Shares and Securities

Relief is available on gains on disposals of shares in (and securities of) a trading company (or the holding company of a trading group) provided that, throughout the one year qualifying period, the individual making the disposal:

- Is an officer or employee of the company (or of a company in the same group of companies) and

- Owns at least 5% of the ordinary share capital, which allows the exercise of at least 5% of the voting rights in that company.

The definitions of “trading company”, “holding company” and “trading group” are as for taper relief on business assets. The gains will not be restricted by reference to non-trading assets.

Associated Disposals

If an individual qualifies for the new relief on a disposal of shares or securities as noted above, he will also qualify for relief on an “associated disposal” of an asset used in the company’s (or group’s) business.

As an example, if a company director who owns the premises from which the company carries on its business sells those premises as well as his shares in the company, the sale of the premises may count as an “associated disposal” and Entrepreneurs’ Relief may be due on the resulting gain.

Deferred Gains

Transitional provisions will also allow relief to be claimed in certain circumstances where gains that have been deferred from disposals made on or before 5 April 2008 become chargeable after that date.