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Associated Disposal Prior to Material Disposal

Can the sale of land used in trading company prior to liquidation qualify for ER?

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Husband and wife own a trading company 50:50. Company operates a garage, has a fair amount of cash in bank, and a couple of investment properties. The land and buildings the company trade through are owned 100% by husband – no rent paid for their use.  

A buyer has offered to buy the land from the husband (over £1m). On it’s own, this won’t qualify for entrepreneurs relief.

My first thought is for husband to transfer at least 5% of his shares to his wife, and so trigger a material disposal of his shareholding, so that we can then look a arguing the sale of the land is an associated disposal. Whilst I’ve seen some commentary online suggesting this would work, the fact that it’s going to his spouse makes me slightly uneasy about it.

My second proposal would be to liquidate the company. At present, the company would be a trading company for ER purposes (despite the investment properties and cash balance), and so this would be just about the last time to secure ER on the company’s assets.

My issue is, the winding up process of the company may take some time, and will certainly happen after the disposal of the land.

Will he still be entitled to ER on the sale of the land? Will the timing of the two events, i.e. the associated disposal taking place before the material disposal, affect this?

The legislation (TCGA 1992 s169K) doesn’t seem to stipulate an order in which the disposals take place, merely “that the associated disposal is made as part of the process of withdrawal of the individual from participation in the business of the trading company.”

I don’t think there’s much doubt that the sale of the trading premises, and subsequent liquidation of the trading company, are part of the “withdrawal of the individual from participation in the business of the trading company”, so I feel there is an argument to be had here.

Having only ever applied the associated disposal rules to instances where the associated disposal took place after the material disposal, I’d be interested in others opinions on this.

Replies (16)

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By The Dullard
24th Feb 2020 14:41

Will the business cease when the land is sold? s 169K(4) refers.

S 169K(4) clearly anticipates a cessation of trade prior to the disposal, permitting the associated disposal at that time.

I don't think the associated disposal needs to be at the same time or after the material disposal. HMRC do take that view, but that doesn't mean it's right.

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Replying to The Dullard:
Lone Wolf
By Lone_Wolf
25th Feb 2020 09:39

Yes, once sold there will be no trade left in the company, and there's no intention to start up again. so I think Condition C is fine.

I've also been made aware of guidance on Croner-i "573-000 Disposal associated with material disposal", and that states:

"The legislation, like that for retirement relief, does not actually specify that both the material and associated disposals should take place at the same time, or indeed, in any particular order. They must, however, share the same objective: that of enabling the individual to withdraw from the business concerned."

Think this might have some mileage.

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Replying to Lone_Wolf:
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By Tax Dragon
25th Feb 2020 10:22

I took Dulls at his word about HMRC's view on the order of events. But I can't see that they say anything different to croner-i. From CG63998:

"...where a... company ceases to trade, it is quite possible that there may be an interval between the 'material disposal' and the disposal of the asset that is the subject of the 'associated disposal'." It then sets out the one year/three year guidance, that time being implicitly after cessation - but notably unrelated to the time of the material disposal.

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Replying to Tax Dragon:
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By The Dullard
25th Feb 2020 10:44

Possibly it was a slightly different point.

The question has come up before in the context of a sale and (short) leaseback arrangement (prior to an anticipated separate sale of the company and its business), and I recall that it was read by somebody that HMRC only accepted that the disposal could happen after cessation of the business, whereas the words in the legislation, "within one year of cessation", can be interpreted to cover a period running from one year before cessation to one year after.

Obviously, it would be unusual for the associated disposal to occur before cessation and to occur as part of the withdrawal from the business and for the asset to still be in use in the business at the date the business ceased. Those were the facts in the situation referred to though, IIRC.

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Replying to The Dullard:
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By Tax Dragon
25th Feb 2020 11:00

The "within one year of cessation" quote is in the guidance. I take the view, as far as possible, that HMRC is best placed to interpret its own guidance, as it knows what it was trying to say. The legislation sets out the actual tests - that in s169K(4) is as you described.

I don't recall the thread you mention. I would like to see it. I would suggest that the answer may come down to the meaning of "assets which (or interests in which) are disposed of". If freehold land is sold and a short lease acquired (by whom? The company? Does it matter?), is the asset disposed of still in use at cessation?

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Replying to Tax Dragon:
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By The Dullard
25th Feb 2020 11:50

Sadly, I can't recall, and I may have misremembered.

I think you'll find though that if I have a freehold interest, sell it and retain a leasehold interest, that (for CGT purposes, based on case law) I have made a part disposal of what I had and have acquired nothing. If I am then enjoying the use of the same thing in exactly the same way, I am using both what I disposed of and what I retained, because both are part of the same whole that I had before the part disposal. They're not separate assets.

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Replying to The Dullard:
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By Tax Dragon
25th Feb 2020 12:14

Thank you. That answers my parenthesised "does it matter?" question.

On the other hand, is the interest in the asset disposed of still used? The legislative parentheses may do more damage than mine.

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Replying to Tax Dragon:
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By Tax Dragon
25th Feb 2020 12:55

Sorry. It's the asset, not the interest in it, that needs to be in use. (I never was any good (with parentheses. (There isn't a 'P' in BODMAS!)

I'm happy with the answer that I suspect the lost thread came up with.

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Replying to Tax Dragon:
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By The Dullard
25th Feb 2020 13:11

Well to address the point anyway...

Assume that a freehold interest is an interest lasting 1,000 years, and a 999-year lease is a an interest lasting 999 years (because it is) and a 1 year's lease is an interest lasting 1 year (again, because it is).

Now, in each case, the whole of the interest cannot be in use when the business ceases; only a moment's slice of the interest. Meanwhile it is the whole of the asset in which the interest subsists that can be so used in its entirety.

Hadn't really thought about it though. It was just a recollection.

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Replying to The Dullard:
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By Tax Dragon
25th Feb 2020 13:23

(To borrow a phrase from our, now mellowed, lupine colleague...)

My answer, more clearly put.

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By Tax Dragon
24th Feb 2020 15:05

Been to the dentist, Wolfie?

The difference in wording between s169K(4) and the Retirement Relief provision on which it is, I guess, based, means that you cannot rely on Clarke v Mayo. So HMRC might have got their way now. But I would interpret "sold" in Dulls's reply as referring to completion, which perhaps provides a little bit of leeway.

Thanks (1)
Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
25th Feb 2020 09:53

I have, wasn't feeling quite as snarly. Not sure I'm liking the new one though - head doesn't even fit in the picture.

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Replying to Lone_Wolf:
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By Tax Dragon
25th Feb 2020 10:25

We get your best side, I'm sure.

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
25th Feb 2020 10:49

I'm not sure I have a best side to be honest.

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Replying to Lone_Wolf:
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By Tax Dragon
25th Feb 2020 11:03

Blimey. What has the dentist done to you?! Only two teeth left!?

(No wonder you're howling.)

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By frankfx
24th Feb 2020 21:13

May be worth having a word with a / the insolvency practitioner.

They must enounter this scenario from time to time.

And how other accountants addressed the problem.. with the outcome.

A good query.

Everything is " above board" but HMRC snakes and ladders mean tax payer is left in uncertain territory.

Let's know how you get on.

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