By Mike Hayes, Tax partner at Kingston Smith LLP
Many people are aware that entrepreneurs’ relief (ER) is available on the disposal of shares or a qualifying interest in a business. Fewer will know that ER is also available on the associated disposal of assets held personally by the shareholder or business owner but used by the business.
For example, a director of a company who personally owns the property from which the company trades may not be aware that, if he were to sell his shares in the business and qualify for ER, he may also get ER on the disposal of the property should he sell it at the same time.
For a disposal to be an associated disposal and qualify for ER, the following conditions must all apply:
- There must be a material disposal of an interest in the business or qualifying shares;
- As part of the withdrawal from the business, the individual must also make a disposal of an asset used in the business (note that this can be a partial withdrawal from the business);
- The asset must have been used in the business for at least one year.
Where assets are only partly engaged for business use, ER will be proportionately restricted to only the business use element.
For example, if a property which has been owned personally for ten years has only been used for business purposes for five years, ER will be restricted to 50% of the gain. Equally if, throughout the period of ownership, only one floor of a three-floor property was used for the business, ER would be restricted to an appropriate proportion of the gain.
Similarly, if the business has been charged rent by the individual for use of the asset, the availability of ER is restricted. If no rent is charged, full ER will be available. However, if rent is charged at full market rate, no ER will be available. Rent paid before April 2008 (when ER was introduced) is ignored, so full ER will still be available even if rent was received before 6 April 2008 provided no rent was received after this date.
It is also important to point out that, in order to receive full ER, the asset owner needs to have held an interest in the qualifying business throughout the whole period during which the asset has been used in business. For example, an individual who lets a property to a business for five years and then becomes a qualifying shareholder and director of the company would not get ER on the future disposal of the property, under the associated disposals rules, on the gain attributable to the five years when he was not involved in the business.
The relief for associated disposals is extended to apply for assets disposed of within three years of the cessation of the business provided the asset was used in the business at the time of cessation and is disposed of within three years of the business ceasing. In this case, there are no restrictions on what the asset can be used for in the post-cessation period. The asset could be let out in the three year period after cessation for market rent and still qualify for full ER provided the asset is disposed of within three years of the cessation of the business.
Next time: Mike Hayes discusses how earn-outs could earn you out of paying capital gains tax at only 10%.