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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.
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