The entrepreneurs’ relief (ER) rules have been altered almost every year since their introduction in 2008, so it’s important to keep up with the latest changes.
ER came into effect on 6 April 2008 to replace taper relief, but the range of assets that qualify for ER is more restricted those which qualified for taper relief. In particular the disposal of a building that has been used for business purposes won’t necessarily qualify for ER, where it would have done under taper relief. It depends on exactly how the disposal is carried out.
This detail caught out accountant Dilip Amin when he engaged in a little tax planning which involved selling shares in his business premises to his self-invested pension scheme (SIPP).
Although Amin traded as “Amin, Patel & Shah”, since 1988 the firm consisted only of Amin alone, so the business was a sole-trader not a partnership. This fact is important for ER as the rules for claiming the ER on assets used by a sole-trader are quite different to those which apply to business assets used by partnerships.
Sole trader position
For ER to apply to the sole-trader’s business-related asset it must either be disposed of within a three-year period that starts on the date the business ceases to trade, or as part of the disposal of the whole or a significant part of the business. Selling a building, or a share in a building with no other assets won’t count as a disposal of part of the business. This was confirmed by the judge in Dilip Amin v HMRC (TC05265).
In this case Amin sold 22.7% of the beneficial interest in his business premises to his SIPP on 4 April 2008 (under the taper relief regime) for £249,700. Then on 25 June 2008 his sold exactly the same percentage of the property to the SIPP for the same value (under the ER regime). A third interest amounting to 4.3% of the property was sold to the SIPP on 23 April 2010 for £43,700.
The valuation of the first two property interests coincidently fell just below the £250,000 threshold for SDLT, so the rate of SDLT payable was 1% on each transaction. However, as those transactions were all made between the same vendor and purchaser, and could be seen to be part of a single arrangement, the sales would be linked for SDLT purposes (FA 2003, s 108). In which case SDLT would be due at 4% on the aggregate value of the three transactions. It is not known whether HMRC took that point in this case.
HMRC did challenge Amin’s claim to ER in his 2008/09 tax return. Amin replied saying “relief is due on the grounds that building is used in the business”. HMRC replied saying that Amin had not sold part of his business and had clearly not ceased his business.
At the tribunal Dilip Amin claimed he had transferred his audit clients to Mr N S Amin during 2008/09 for a nominal sum of 99p. N S Amin said this was a verbal agreement so there was no evidence in writing. HMRC successful argued that as the sale of an interest in the property was not connected to the disposal of the audit clients, the two transactions could not be viewed together as the sale of part of the business. The ER claim therefore failed.
Where a partner disposes of an asset he owns personally, but which is used by the partnership for business purposes, ER will be due if the disposal qualifies as an “associate disposal”. Before 18 March 2015 an associated disposal required the partner to also reduced his interest in the partnership by any amount, at the same time as making the asset disposal. From 18 March 2015 the partner must dispose of at least 5% of the partnership, although a retiring partner who holds less than 5% of the partnership can still make an associated disposal when he leaves the partnership.
If D Amin had gone into partnership with NS Amin, or even formed a company with NS Amin, his claim for ER on disposal of the business premises may have succeeded. The partnership or company would have had to trade from the building for at least a year before D Amin made his disposal. After that period D Amin could have sold or given some shares to NS Amin on each occasion that he disposed of a share in the building to the SIPP. Each disposal of an interest in the building would have then qualified as an associated disposal for ER.
Do not assume that the tax rules have continued unchanged when you make, or advise on, an asset disposal. The changes to ER for associated disposals made by FA 2016 have been back dated to 18 March 2015.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.