Entrepreneurs Relieif and Capital Gains Tax Exposure

Hmmmmm

Your question suggests that the activity of the nursery will cease, but it is possible that you may move it to other premises.  Whilst not significant from a taper perspective this makes an enormous difference with ER.  ER can be claimed on the disposal of asset which represents the whole or part of a business (ie with goodwill), or where the asset was in use in the trade when it ceased, if sold subsequently, or as an associated disposal when withdrawing from a partnership or reducing the share holding in a qualifying company (at least 5% and employee/director).

Assuming that the nursery trade ceases and new trade as a property developer seems to begin  then an asset (the residential property) has been appropriated into trading stock at open market value, this will also constitute a deemed disposal for CGT purposes (see s161 TCGA).  It is possible to elect to avoid the gain, thus postponing the liability by treating the CGT base cost as the base cost for DI purposes, but then ER would be lost.

So CGT to the date of appropriation - ER if the conditions are satisfied - if the tade as a nursery ceases yes, if the trade transfers elsewhere - no, and then a trading profit from that point onwards as a property developer.  Simples?

Options

Option 1 - IF the development constitutes a trade then there wuill be an appropriation into trading stock, the gain to that date will qualify for ER - the trade profit will be taxable at IT marginal rates. If the development were not to be treated as a trade there would be no appropriation and the gain on realisation would not qualify for ER IMHO as it would not fall within any of the qualification hurdles set out in the act.

Option 2 - No doubt at all - ER is available and whole gain taxed at 10%

Option 3 - Also no doubt, ER available provided sold as a going concern.

The safest course may be to negociate a higher price with the development company under which they own it outright from the date of disposal within option 2.  I do think the development would constitute a trade if done on a joint venture basis with the DV company, but the danger would be an understatement by HMRC of the value of the property at the date of appropriation on the grounds that no goodwill attaches to a property in use in a rtrade that ceases, exposing a larger gain to higher marginal rates.  Option 2 clarifies the position with no doubt as the DV Co is not a connected person.