United Kingdom Capital Gains Tax
Relief on disposal
of a business
(Entrepreneurs' Relief)
1. The United Kingdom Chancellor
on December 2, 2008, announced a new relief ('Entrepreneurs' Relief') from
Capital Gains Tax for gains arising on the disposal of a business.
The relief
2. The relief will take effect
from 6 April 2008 alongside the Capital Gains Tax reform programme announced
at the Pre-Budget Report.
3. The UK capital gains tax relief
will be available in respect of:
-
gains made on the disposal of
all or part of a business
-
gains made on disposals of
assets following the cessation of a business
-
gains made by certain
individuals who were involved in running the business
4. The first £1 million of capital
gains that qualify for relief on the disposal of a business will be charged
a UK Capital Gains Tax at an effective rate of 10 per cent. Gains in excess
of £1 million will be charged at the normal 18 per cent rate.
5. An individual will be able to
make claims for relief on more than one occasion, up to a lifetime total of
£1 million of gains qualifying for relief.
Background note and further
details
6. At the Pre-Budget Report the
Chancellor announced a major reform of the Capital Gains Tax regime. From 6
April 2008 there will be a single rate of CGT of 18 per cent. As part of
this change the tax-free Annual Exempt Amount (£9,600 for tax year 2008-09)
will remain, but Taper Relief and Indexation Allowance will be withdrawn.
Draft legislation relating to the changes proposed at Pre-Budget Report has
been published on the HM Revenue & Custom (HMRC) website.
7. The new relief announced will
reduce gains liable to Capital Gains Tax (at the single 18 per cent rate) by
four ninths, resulting in an effective 10 per cent rate (5/9 x 18%). The
relief will be available for gains of up to £1 million on disposals of a
business by an individual.
Example
Sarah sells her trading business
and realises gains of £450,000 (before Entrepreneurs' Relief). She has made
no other claims to the relief, and the whole of the gains are eligible for
relief. If she claims the relief the gains of £450,000 will be reduced by
four ninths (£200,000) and £250,000 of the gains will be liable to Capital
Gains Tax (subject to deduction of any allowable losses and the Annual
Exempt Amount).
8. The conditions for the new
relief will be based broadly on the Capital Gains Tax 'Retirement Relief'
(at sections 163 and 164 and Schedule 6 Taxation of Chargeable Gains Act
1992) that was phased out between 1998 and 2003, but the new rules will be
simpler. There will be no minimum age limit for Entrepreneurs' Relief. And
in general Entrepreneurs' Relief will be available where the relevant
conditions are met for a period of one year, instead of the retirement
relief qualifying period of up to ten years. Draft legislation will be
published shortly.
9. The relief will apply to gains
arising on disposals of the whole or part of a trading business (including
professions and vocations, but not including a property letting business
other than furnished holiday lettings) that is carried on by the individual,
either alone or in partnership. Where a business is not disposed of as a
going concern, but simply ceases, relief will be available on gains on
assets formerly used in the business and disposed of within three years of
the cessation of the business.
10. The relief will also apply to
gains on disposals of shares (and securities) in a trading company (or the
holding company of a trading group) provided that the individual making the
disposal:
-
has been an officer or employee
of the company, or of a company in the same group of companies
-
owns at least five per cent of
the ordinary share capital of the company and that holding enables the
individual to exercise at least five per cent of the voting rights in that
company
The terms 'trading company',
'holding company' and 'trading group' will have the same meaning as they
currently do for the purposes of Taper Relief on business assets. Because of
this, there will be no requirement to restrict the gains on shares by
reference to any non trading assets held, as was the case for Retirement
Relief.
11. Where an individual qualifies
for Entrepreneurs' Relief on a disposal of shares or securities under the
previous paragraph, relief will also be available in respect of any
'associated disposal' of an asset which was used in the company's (or
group's) business. For example, if a company director who owns the premises
from which the company carries on its business sells the premises at the
same time as he sells his shares in the company, the sale of the premises
may count as an 'associated disposal' and any gain attract Entrepreneurs'
Relief. The relief due on an associated disposal will be restricted where
the asset in question was not wholly in business use throughout the period
it was owned.
12. A similar rule will allow
relief on an 'associated disposal' by a member of a partnership who is
entitled to relief on disposal of his interest in the assets of the
partnership. (Again, relief will be restricted where the asset in question
was not wholly in business use throughout the period of ownership.)
13. Trustees will also be able to
benefit from Entrepreneurs' Relief on gains on assets used in a business. In
order for trustees to benefit, a beneficiary of the trust with an interest
in possession relating to those assets must be involved in carrying on the
business in question, personally or as a partner. In the case of shares such
a beneficiary must qualify as an officer or employee of the company in
question. The conditions under which trustees qualify for relief will be
generally similar to those for Retirement Relief. In particular, the £1
million maximum limit on gains eligible for relief will apply to the
trustees and the qualifying beneficiary jointly.
Further advice
The Entrepreneurs' Relief outlined
in this note has now become law (sections 169H to 169S of the Taxation of
Chargeable Gains Act 1992, as inserted by Schedule 3 to the Finance Act
2008). Guidance on Entrepreneurs' Relief can be found in HM Revenue &
Custom's Capital Gains Manual at paragraphs CG63950 to CG64170.
|