Entrepreneurs relief - associated disposal

Entrepreneurs relief - associated disposal

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A partner withdrawing from a partnership will on withdrawal sell his 50% share in the partnership premises to remaining partners. The premises comprise of ground floor and first floor offices. For the first 7 years of ownership, these were used entirely for the partnership business. For the remaining 4 years, the first floor has been let to an unconnected partnership. Therefore, in the period of one year ending with the material disposal, the property was only partly used in the partnership business.

Is the restriction to entrepreneur's relief calculated solely by reference to the use during the one year prior to disposal? Or can additional relief be claimed by also taking into account the earlier period when the whole asset was used in the partnership business?

Julie Saunders

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By michaelblake
17th Sep 2008 17:44

Tricky
A partner withdrawing from a partnership will normally be able to claim relief on a gain arising on the disposal of the whole or part of his share in the partnership business, or on gains arising on assets owned by the partnership, and used by the partnership in the partnership business, provided that the assets were in use at the time that he left the partnership and provided that the individual has been a partner for at least 12 months.

The points to be cionsidered then are what is the asset that is being disposed of and what does the partnership's business consist of? On the face of it the asset is the property as a whole. If the trade was a hybrid trade, including the letting, and the property is owned as a partnership asset you could argue that the disposal of the share in the partnership includes the share in the property. The difficulty with that argument is that "business" for the purposes of the relief means a "trade, profession or vocation" and letting although it may be a business in the ordinary sense is not normaly regarded as a trade. There are no provisions within the relief (as there are for example with rollover reluief) for treating the part of the asset used by the partnership as a seperate asset to the part let.

If the property is owned not by the partnership but by some of the partners outside of the partnership, then the associated disposal rules at Sections 169K and P come into play. Condition C at Section 169K appears to require that the asset was used for a period of 12 months ending with the date that the partner leaves the partnership and only if that condition is satisfied would you then go on to consider the restriction at s169(P)(4) by reference to floor area and time if the whole of the asset has not been used by the partnership throughout the period that it has been owned. so again arguably no relief would be due if the whole of the asset has not been used at all by the partnership for the purposes of its own trade in the last 12 months.

It would seem to be a strange result if relief is denied altogether and it is possible that HMRC would not be so restrictive in thier interpretation. It would be worth checking the HMRC guidance, if it has appeared in the CG manual (I have not done this) to see if they interpret matters more generously.

Is the query from Asthall Leigh?

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