Entrepreneurs' relief: Draft legislation and guidance notes published

I believe that having separate entities for separate asset disposals will work.

I have explored this in the context of splitting an existing single entity, (company in my client's case), such that each asset is being used by a separate entity. Then on sale of that asset the company running that business will cease and Ent Relief will be available. The point being that the asset will be sold as an associated asset at the same time as the shares in that company are disposed of, (or C16ed).

In your case, Abbas, the trade of the existing business, (you do not say if it is a partnership or company), will have ceased and so Ent Relief will be available re the sale of the first site.

In the case of the second site you may transfer the site to the new, children's, business or it could be retained by the original owners and rented to the children. In the former scenario there may be SDLT, though Ent Relief will be avaialable, in the latter Ent relief may be lost through the owner's trade no longer continuing or through market rent being charged.

Malcolm
Thank you for your comments. Very useful. The business is a partnership.
Just as I thought, allowing the children to start a new business and charging rent would solve the problem. The 2nd property was bought recently, therefore Capital Gain in the near future very remote.
However it would appear that the existing partners (Husband and Wife) both working full time cannot be involved with the new business or would it be alright as this new business may have 3 or 4 partners ie. 2 children and 2 original partners. Should the business be incorporated to be on the safe side. Do you agree or would it cause problem. Any anti avoidance ruling on this.
What about the name of the business, should this be sold to the new business and therefore a fair goodwill calculation may have to be made. What do you think ?

Can somebody help?
If an existing business sells the land on which the business is being run and because of this, the business ceases completely, as far as I am aware you can claim entrepreneurs relief and there are no probems lurking.
How about if the business owns another property (not used in the current business and it is empty) adjacent to the existing business and transfers a small proportion of the business to these premises, as far as I can make out the entrepreneurs relief will be denied because the business had not completely ceased.
In order to overcome this problem, can a member of a family (children) start a business afresh and rent the adjacent property from the previous business owners?
Did consider incorporating for the new business. Can this help?
Would be very grateful if Rebecca, Nichola or anybody else who feel's that they can help on this matter such that entrepreeurs relief can be claimed and also carry on in business in a small way on the adjacent site.
A structured reply would be very useful.
Thank you in advance.

It seems that a deferred gain which would not have attracted full (or possibly any) taper relief could have qualified for the one year period of Entrepreneur's Relief (say a gain made in 1998). On bringing it back into charge now the full gain will be taxed. But if we wait until after 5 April, only 5/9ths will be taxed.
Is this correct?

Yes, this seems most unfair as under BATR the rent would not have been an issue. They may have bought with a mortgage and need the rent to cover the interest charges.

The trouble is, it follows old retirement relief, but without the old ten year window. Under RR you would drop the rent in the last 10 (or even 5) years to improve relief. Here, we seem at the moment to be working on the entire period the property is owned. Your suggestion to ignore pre 2008 rent is a good one - but may fall on deaf ears!

Why not close down now, and then restart next year? Obviously, it does depend on your marginal tax rates so check these out properly first.

The reason why one did not go advising this sort of course of action in the past was that you might get caught under the anti-avoidance provisions in what is now Part 13 of ITA 2007 (anti-avoidance - tax advantage from avoiding income tax). But to be frank, given the number of companies which are being voluntarily struck off by their members at the moment, and considering the cost to "performance driven HMRC" of trying to reinstate and investigate companies which have already been struck off, I would say that your chances of being caught by the provisions are extremely low.

How does it come up on moral grounds? Well, assuming that you can justify to yourself that you are not breaking anti-avoidance rules you could I suppose use the argument that if private equity pay tax in 2006/07 at 10% why shouldn't we all?

Harry

In reply to your question,the obvious answer is that a winding up before 5 April would preserve the facility to claim Entrepreneur's relief on the disposal of a business or "associated" asset in the future.

Pitfalls to watch:

If proceeding on the ESC C16 route,note that the clock is ticking to have this organised in
time(will you find an Inspector to reply to your request?),

Previous comments on this thread concerning bona vacantia,

The threat of an attack under s684 ITA 2007(transactions in securities) if the client forms a
successor trading company after 5 April

Brian Ogilvie
Accountingweb tax lecturer
www.ogilvietax.co.uk

Nichola

You are spot on in saying that an individual client's chances of being caught by the provisions are extremely low.....the problem is of course the old one of the unlucky client pulled out of the pile and subject to some nasty medicine in the form of part 13 of ITA 2007.

Ouch for the accountant who recommended this course of action without advising of the pitfalls and suggesting insurance cover.......

An analogous situation will arise 2010 onwards when HMRC cherrypick a few family partnerships and companies for a grilling under the income shifting provisions - the sheer numbers of businesses involved make it unlikely that an enquiry will follow,but statistics show that some unlucky client will "cop it"

With reducing numbers and increasing powers,there will of course in the end be only 6 VERY POWERFUL tax inspectors left ...........

Brian Ogilvie
Accountingweb tax lecturer
www.ogilvietax.co.uk

NIchola

You are right to point out the potential dangers of the Treasury solicitor "snaffling(great word) a company's assets where,in an ESC C16 case, these exceed £4000.

Help may be available after October 2009,from which date a private company will be able to reduce its share capital by special resolution, supported by a solvency statement (s641 CA 2006).

This will (presumably) result in the company in most cases being left dormant with nominal share capital and a few pounds in the bank....allowing for costs of ongoing minimal Companies House admin and preparation of the statutory statement the right result should follow without threat of Govt "snafflers"!

Brian Ogilvie
Accountingweb tax lecturer
www.ogilvietax.co.uk

A non-tax problem is that the Treasury solicitor may try and snaffle your company's assets if they exceed £4,000 on winding up.

Refer to: http://www.bonavacantia.gov.uk/default.asp?PageId=1409, the relevant extract (dated January 2008) is as follows:

Permitted Distributions

9. It has been recognised that it would be unreasonable for the Treasury Solicitor to expect that a company is put into formal liquidation when that would be uneconomic, especially bearing in mind that HM Revenue and Customs Extra Statutory Concession C16 permits a distribution for tax purposes without the company having to incur the costs of a formal liquidation. It is therefore been agreed with HM Treasury that if:

9.1 a company has been struck off under Section 652A of the Companies Act 1985, and

9.2 the shareholders have taken advantage of the extra statutory concession C16, and

9.3 the amount of the distribution is £4,000 or less, then

as a concession the Treasury Solicitor will waive the Crown's right to any funds, which were distributed to the former members prior to dissolution.

we were trying to complete pre 6.04 but we asre a bit pushed fro time - i presume that is better - stamp duty problem noted i had not focused in on that as i should have

... is the effect of market rent on associated disposals disqualifying from ER a disposal that otherwise would have qualified. Back in the days of Retirement Relief, if someone decided to charge a rent he did so in full knowledge of the consequences in relation to Retirement Relief. We have a number of clients who have been receiving full market rent for properties personally owned and used in their own companies or partnerships, secure in the knowledge (until now) that they would get BATR. These individuals cannot now go back and undo the rents that have been charged.

ER was introduced as a political expedience to provide a buffer for those most dramatically affected by the withdrawal of BATR. I cannot think of any political justification for excluding this class of taxpayer. Perhaps they are just a sufficiently small proportion of the population that their howling in pain has no influence.

An equitable amendment might be to take into account only market rents charged since 06 April 2008?

To quote the bona vacantia website:

"Before a company is dissolved, the member should ensure that assets owned by the company are dealt with prior to dissolution and transferred out of the company's ownership. If this is not done, assets owned by the company at the date of dissolution will pass into the ownership of the Crown. Such assets are then known as bona vacantia which is a Latin expression meaning ownerless goods."

Nichola
Isn't it only where the share capital exceeds £4,000 on dissolution that there may be a problem with bonavacantia, not the amount of the asset distribution?

Check out s251(6) TCGA 1992, which could cause automatic rollover under s135 TCGA 1992.

What has that to do with Entrepreneur relief! Well consider in a few months time ,you are advising a client on two different offers for his company ,one from a UK company offering cash plus QCB s and one from a non UK company which is only prepared to offer non-QCBs-I suspect the first will be much more attractive.This is because Entrepreneurs relief will be available when the QCB is cashed in as opposed to having to either elect for paper for paper relief to be set aside and paying tax upfront or paying 18% when the non QCB is cashed in.So hidden discrimination against a continental or US acquirer in favour of a UK one? The hmrc rational is probably of the quality of QCB is the default mode and hence you go for a non QCB to avoid tax-not necessarily so in many cases its what you get because of the commercial deal.

As this thread is on ER I'll give my view as if you are..

Property is occupied for the purpose of the trade. You will regard the company as a trading company if it meets the BATR tests - 20% rule in play. So likely you are fine - you don't mention other investments / non trade activities. OK so the company meets the tests. Your shareholder needs at least 5% of the ords and voting rights, held for at least a year. Home and dry. Whether you dispose of the property or distribute in specie it won't make any difference (once you get ESC C16 squared away) as long as you don't hang about too long after ceasing trade / disposal of property. Watch the SDLT, and of course CGT in the company, whichever way you go. If I have answered the wrong question do let me know!

if there is real property within a company (that the company occupies)that intends to apply for ESC c16n will that qualify and are there any other pitfalls in the legislation?

Thank goodness Aweb is keeping an eye on things. I have been looking on the HMRC website and there is even today nothing obvious there to suggest that the draft legislation has been published.

There is no mention of it on the Home page or under What's New or under Budget and no links from the Press Release of 24 January that anniounced the relief.

Hopeless.

A Google search on "Entrepeneurs' Relief draft legislation" led to this item on Aweb which leads to the depths of the HMRC website where this stuff is buried!

I think you must be so here's what I reckon they mean.

The special transitional relief is only available on QCB's (para 6 of draft Sch) and EIS / VCT disposals or chargeable events (para 7). This allows a pre 2008 gain which has been deferred to qualify for ER when it resurfaces. Para 6 is limited to QCB's by virtue of the reference to S116(10) TCGA.

I think otherwise you will have to be making a material disposal after 2008 for relief to be available - this seems to be what the FAQ's are saying - which means that the disposal of non QCB's is a "disposal of shares or securities" where the owner ALSO has 5% of the ordinary shares in the company etc etc.

This seems to tie in with the limited scope of the transitional relief.

Looking at FAQs 2, 11 (and perhaps 13) there seems to be a very significant difference between the availability of Entrepreneur's Relief if you cease to be a shareholder.

Under QCBs, the Relief is available if your shareholding would have qualified for the Relief at the time of the disposal;.

Whereas for a non-QCB requires the conditions to be met at the time of the redemption (ie you still need to be a 5% shareholder for the 12 months prior to redemption).

BIt of a big difference if you have ceased to be a shareholder!

Have I interpreted the position correctly or missed something.

Thanks

Yes, the relief will be restricted if the asset has been made available in return for rent. Where market rent has been charged, then no ER is available. See Draft Section 169P(4)(d).

Owners of property kept out of their companies for CGT and other tax reasons have a problem here - they need to eliminate the rent but it certainly looks as if the restriction will apply for the entire ownership period, that is including pre 6 April 2008, when the availability of BATR is not compromised by rent. If you have a loan secured over the property and have therefore been drawing rent to cover the interest you only have partial ER available. So can you take the BATR and run??

Company secretaries (or other officers such as non-exec directors) still have to hold >5% of share capital to qualify for the relief.

One snippet amongst the deluge of legisalation & guidance. The Company Secretary is an officer and qualifies for Ent Relief - suddenly an incentive for all the small companies to not take advantage of the change in Companies Act 2006 to have no secretary. (I know that this has to be balanced against the impact of income shifting).