The associated disposal rules were changed from 18 March 2015 (by FA 2015), to require the taxpayer to dispose of at least 5% of his partnership, or personal company, if he wanted to claim entrepreneurs’ relief on a personally held business asset which he sold at the same time. This rule was to be further tweaked by new proposals in Finance Bill 2016 to be back-dated to apply to disposals made from 18 March 2015.
Fred is a member of a trading partnership, and he also invests in property. The gains he makes when he sells those properties don’t qualify for entrepreneurs’ relief as property investment isn’t a trade for that relief, so he must pay CGT at 28% or 20% on those gains.
If his trading partnership uses one of his investment properties as an office for at least a year, that property becomes a business asset. When he later sells that property, and at the same time reduces his interest in the partnership, he can pay CGT at 10% by claiming entrepreneurs’ relief on the property disposal as an “associated disposal”.
For disposals made on and after 18 March 2015 the reduction in his interest in the partnership must be at least 5%.
Proposals in Finance Bill 2016, if imposed as suggested, would require Fred to have to owned the investment property (used by the partnership for its business) for at least three years before it could qualify as an associated disposal for entrepreneurs’ relief. Also Fred would need to be a member of the partnership (controlling at least 5% of the partnership assets) for at a continuous period of at least three years in the previous eight years ending with the date of disposal.
When the taxpayer makes an associated disposal of a personally-held business asset, the three year ownership period will only apply to assets acquired on or after 13 June 2016. So in the example above Fred doesn’t have to meet the three year ownership rule as he owned the property which was used by the partnership from a date before 13 June 2016.
The condition that the taxpayer must hold at least a 5% interest in his partnership is also changed. In most circumstances the partner must reduce his interest in the partnership by at least 5% when he makes an associated disposal. But what if the partner is retiring and has already reduced his interest in the partnership to below 5%?
In this case the retiring partner will be able to claim the relief on an associated disposal made when he finally disposes of all his interests in the trading partnership, even if that last fraction of partnership interest amounts to less than 5%.