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					                                                                                                                      Entrepreneur’s Relief

                             Capital gains tax (CGT) has been set at a rate of 18% since 6 April 2008 and that time taper relief and
                             other rules were removed. Under the previous regime, many people with full business asset taper
                             relief would have had an effective CGT rate of 10%. Entrepreneurs' relief (ER) was introduced from 6
                             April 2008 to provide an effective rate of tax of 10% on 'qualifying business disposals' by reducing the
                             gain by 4/9ths. However, unlike taper relief, ER only applies to the first £2 million of lifetime gains and
                             the rules for qualifying business disposals are complicated.

                             What is a 'qualifying business disposal'?
                             In order to qualify for ER there must be a qualifying business disposal. The following are qualifying
                             business disposals:-
                                A material disposal of business assets
                                A disposal of trust business assets
                                A disposal associated with a relevant material disposal

                             What is a material disposal of business assets?
                              A disposal of the whole or part of a business - where the individual has owned the business for the
                              year leading up to the date of disposal
                              A disposal of assets in use for the purposes of the business where the business ceases to be
                              carried on - if the disposal is made within three years and the individual owned the business for the
                              year preceding the cessation
                              A disposal of shares or securities of a company - where one of the following conditions is met:

                             Condition A - throughout the year preceding the disposal (i.e. 12 months):-
                               the company is the individual's 'personal company'
                               the company is a trading company or holding company of a trading group, and
                               the individual is an officer or employee of the company or trading group.

                             Condition B - where the company has, within the three years preceding the disposal, ceased to be
                             either a trading company or a member of a trading group, the conditions above must be satisfied
                             throughout the year preceding the cessation.

                             For the purposes of ER, an individual's personal company is one in which they hold at least 5% of the
                             ordinary share capital of the company and have at least 5% of the voting rights in the company.

                             A trading company or trading group is defined as one which carries on trading activities and does not
                             carry on other activities to a substantial extent. This is the same as the definition that applied for taper
                             relief purposes.

                             What is a disposal of trust business assets?
                             Trustees can benefit from ER if the trust makes a disposal of 'settlement business assets', there is a
                             'qualifying beneficiary' and the 'relevant condition' is met. There is a disposal of settlement business
                             assets if the trustees dispose of property being shares or securities of a company or assets used (or
                             previously used) in the business.




www.ellacotts.co.uk

    For information: This material is published for the information of clients. It provides only an overview of the
   regulations in force at the date of publication, and no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or
             refraining from action as a result of the material can be accepted by the authors or the firm.
                                                                                                                      Entrepreneur’s Relief

                             Qualifying beneficiary
                             There needs to be a qualifying beneficiary who has an interest in possession trust (which is not for a
                             fixed term) in the whole of the settled property or in a part of the settled property that contains the
                             assets disposed of.

                             Relevant condition
                             Where there is a disposal of shares or securities in a company, the relevant condition is that
                             throughout a period of one year ending within the three years prior to the date of the disposal:-

                                 the company is the qualifying beneficiary's personal company
                                 the company is a trading company or the holding company of a trading group, and
                                 the qualifying beneficiary is an officer or employee of the company (or of one or more companies
                                 which are members of the trading group).

                             Where there is a disposal of assets that have been used for business purposes, the relevant condition
                             is that:-

                                 the assets are used for the purposes of the business carried on by the qualifying beneficiary
                                 throughout the period of one year ending within the three years up to the date of the disposal, and
                                 the qualifying beneficiary ceases to carry on the business at some time during that three year
                                 period.

                             What is an associated disposal?
                             Where an individual makes a material disposal of business assets which is either the disposal of the
                             whole or part of an individual's interest in a partnership or the disposal of shares or securities in a
                             company, then ER can be claimed on the disposal of business assets owned personally if the
                             following conditions are also satisfied:-
                                The disposal is part of the individual's withdrawal from the business
                                Throughout the period of one year immediately preceding the disposal (or cessation of the
                                business,     if  earlier)     the    assets     are    being    used  for    business   purposes

                             How is the relief given?
                             The relief is given by way of a 4/9ths reduction of the gain up to a lifetime limit of £2 million of gains.
                             Individuals can claim relief for gains made on multiple occasions up to a cumulative total of £2 million
                             and then they will pay 18% on any further gains. Disposals before 6 April 2008 do not affect the
                             lifetime limit. Gains and losses made on the disposal of a business are aggregated before applying
                             the reduction for ER. Any other allowable losses (either in the same year of assessment or brought
                             forward) and the annual exemption are deducted before calculating the tax at 18%.

                             Each individual is entitled to their own lifetime limit of £2 million. Where there is a disposal of trust
                             business assets the trustees can make use of the individual beneficiaries' limits. Where relief is given
                             to the trustees, this will reduce the beneficiary's £2 million limit.

                             A claim for ER must be made on or before the first anniversary of 31 January following the tax year in
                             which the disposal is made. For trusts the claim must be made jointly by the trustees and the
                             qualifying beneficiary.



www.ellacotts.co.uk

    For information: This material is published for the information of clients. It provides only an overview of the
   regulations in force at the date of publication, and no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or
             refraining from action as a result of the material can be accepted by the authors or the firm.
                                                                                                                      Entrepreneur’s Relief


                             Example - Mr A sells his trading business in 2008/09, realising a gain of £1,200,000 (before ER). £1
                             million of the gain is reduced by 4/9ths to £555,555 and the balance (£200,000) is chargeable in full.
                             This results in a chargeable gain after ER of £755,555. Assuming Mr A has no other gains or losses in
                             the year; he would then deduct his annual exemption (£9,600 for 2008/09) and calculate the tax at
                             18%.

                             Are there any restrictions?
                             Other than for a disposal of shares or securities, relief is restricted to 'relevant business assets'. For
                             these purposes goodwill is a relevant business asset. Excluded assets are shares, securities and
                             other investments.

                             The amount of relief may also be restricted for certain trust disposals (where another beneficiary, as
                             well as the qualifying beneficiary, has an interest in the trust property) and certain associated
                             disposals. For associated disposals, the relief is restricted where the asset is not used wholly for
                             business purposes or where the individual has only been involved in carrying on the business for part
                             of the period during which the asset was used for business purposes. Relief may also be restricted
                             where the individual received rent for use of the asset. However, rent received before 6 April 2008 will
                             not affect the relief.

                             How does ER apply to loan notes?
                             This will depend on whether the loan notes are Qualifying Corporate Bonds (QCBs) or non-Qualifying
                             Corporate Bonds (non-QCBs).

                             Qualifying Corporate Bonds
                             Where there is an exchange of securities for QCBs, there is no immediate charge to CGT in respect of
                             the securities, and the gain on the securities is deferred. ER is available on the gains that are brought
                             back into charge at the time the QCBs are redeemed or otherwise disposed of provided the conditions
                             for ER were satisfied at the time the securities were exchanged for loan notes.

                             Transitional rules apply for securities that were exchanged before 6 April 2008, where the deferred
                             gains become chargeable on or after 6 April 2008. ER is available on the gain that comes back into
                             charge if the original sale of the securities would have met the conditions for the relief, had such a
                             relief existed at the time.


                             For further details and advice please contact one of our tax specialists on (01295) 250401.




www.ellacotts.co.uk

    For information: This material is published for the information of clients. It provides only an overview of the
   regulations in force at the date of publication, and no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or
             refraining from action as a result of the material can be accepted by the authors or the firm.