Entrepreneurs’ relief changes lead to retrospective taxation

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The last few Budgets have not been kind to owner managed businesses, with a series of measures being enacted to curtail perceived abuses of the rules for entrepreneurs’ relief.

So it was a welcome change this year to see the Government announcing a relaxation of some of the restrictions that they introduced in 2015.

Unfortunately, in their haste to put matters right, they’ve actually made matters very wrong.

It all comes about as a result of proposals to backdate the amendments to 18 March 2015 when the rules were first changed. If the legislation is passed in its current format, some people who lawfully claimed the 10% rate under the associated disposals rules will find that they didn’t qualify after all. As a consequence, the higher 18%/28% rates should have applied, which means that there is some tax still owing. Will these people be asked to make good the shortfall?

New rules for entrepreneurs’ relief and associated disposals?

The purpose of entrepreneurs' relief is to encourage individuals to set up and grow their own business. If the relevant conditions are satisfied, capital gains arising on the sale of the business are taxed at a rate of 10%.

The relief applies to a disposal of business assets consisting of either:

  • Shares or securities in a trading company, including the holding company of a trading group. The company must be the individual’s personal company in which he holds at least 5% of the ordinary share capital, together with the associated voting rights
  • Assets of a trade, where the individual operates either as a sole trader or member of a partnership. The assets disposed of must constitute all or part of a business.

There is a one year holding period for which the assets must have been owned up till the date of disposal. There are further provisions that permit relief if the assets are disposed of within three years of the business ceasing to trade.

Relief is also possible for an associated disposal where a business owner personally provides an asset for use in the trade (TCGA 1992 s169K). The 10% rate will apply to a disposal of the asset provided that:

  • The asset has been used in the trade for at least one year, ending on the date of the disposal, or (if relevant) when the business ceases
  • The asset disposal is linked to the individual withdrawing from the business by disposing of all or part of his shares or partnership interest as the case may be. This disposal must also satisfy the conditions for entrepreneurs’ relief.

In short, there must be two disposals: The asset used in the trade, together with the individual’s personal share of the business.

For example, consider the case of a partnership that trades from premises owned by one of the partners in his personal capacity...

Register for free and log in to AccountingWEB to see the full article, which also covers:

  • What are the new rules?
  • Issues relating to the backdating of the changes
  • Clawback of relief

Satwaki Chanda is a tax lawyer, who has worked for both a Big Four practice and City law firms. He now writes extensively on business and property taxes - you can find more articles from him on his Tax Notes blog.

 

 

 

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About Satwaki Chanda

A tax lawyer with more than 15 years of tax experience, having worked for City law firms and a Big Four accountancy practice.

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