A client owns a hairdressing salon which trades through a small limited company. The premises used are owned by our client and are rented to the company. Our client has recently applied for planning permission to convert the salon into two flats and on the back of this has decided to retire.
She will cease trading shortly and as soon as permissible afterwards will apply for dissolution. She does not anticipate getting anything for goodwill
The salon has been trading through the company for 5+ years and has always used the same premises.
When our client ceases trading and closes the company she intends to develop the property by dividing it into two flats, putting in bathrooms and kitchens. The properties will then be put on the market and sold. It is anticipated that this will take about 6 months from cessation
My query revolves around entrepreneurs relief - if a slightly tired hair salon has a market value of £180k and 6 months later 2 brand new flats sell for £300k will she be able to claim entrepreneurs relief on the final sale price
Replies (4)
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No! Developing the flats is trading, and (on cessation of hairdressing/commencement of development) there will be a deemed disposal and reacquisition as trading stock taking place at market value, subject to an election to substitute cost.
You could try passing the development through a company, and making it last a year, so that you can liquidate the company and get ER. That way the total tax on the development is only 28%, rather than 40%/45%.
Have not looked at your calcs, but
You say the property has been rented to the trading company by the owner of the company. The property sale, as an associated disposal, could well have ER restricted depending on the rent charged and the market rent:
TCGA92/S169P
Where certain “associated disposals” are made under TCGA92/S169K (see CG63995) the amount of the gain qualifying for Entrepreneurs’ Relief may be subject to restrictions where any of a number of conditions are met.
Where any of the conditions in TCGA92/S169P(4) are met, only part of the gain on an associated disposal which would otherwise be taken into account for Entrepreneurs’ Relief, shall be taken into account, and the balance will remain a chargeable gain without benefiting from the relief. The amount to be taken into account for Entrepreneurs’ Relief is such an amount of the gain as is just and reasonable with regard to the relevant factor - TCGA92/S169P(1)-(5).
The conditions that can result in restriction are:
where the whole or part of the period falling after 5th April 2008 (see FA2008/Sch 3 Para 6) for which the asset(s) which are the subject of the associated disposal were used for business purposes, they were available for that use only on payment of rent (and so were to an extent investments, rather than being employed solely for the purposes of the business).The adjustment will reflect the extent to which the rent paid for periods after 5th April 208 is less than the full market rent for the assets.“Rent” in relation to an asset, for the purposes of Entrepreneurs’ Relief, is defined at TCGA92/S169S(5) and includes any form of consideration given for use of the assethttp://www.hmrc.gov.uk/manuals/cgmanual/cg64145.htm
That appears to be the case
Thanks DJKL
My reading of the manual is that if 80% market rent is charged then 80% of the gain may not have ER leaving 20% of the gain which may have ER claimed
Please would you confirm that this is correct
Many thanks
That appears to be the case based on the worked examples further down on the page I linked. The legislation It is not a tax area I have dealt with, as ER tends not to be much on point regarding my employer's activities, but that is certainly how I read the guidance.