UK: Tax Factsheet - Entrepreneurs’ Relief

Last Updated: 20 July 2010
Article by Richard Mannion and Geoff Everett

Entrepreneurs' relief can reduce the rate of UK CGT to 10% on some disposals. The rules are complex and fairly restrictive. We can help you plan so as not to undermine overall tax or commercial efficiency.

Effective from 6 April 2008, entrepreneurs' relief (ER) reduces the rate of UK capital gains tax (CGT) on certain disposals to 10%. While it is similar in effect to taper relief (its predecessor) it is generally much more restrictive in its application. In addition there is a lifetime cap on the value of qualifying gains that can benefit from ER. For a disposal to qualify, it must come within one of three tightly drawn categories and the qualifying conditions have to be met continuously for a year in advance.

ER can only be claimed by individuals or through a joint claim made by a qualifying beneficiary and the trustees of a life interest trust. Corporate entities cannot claim ER.

As originally introduced, where a claim is made, gains on qualifying business assets suffer tax at an effective rate of only 10%. The 10% rate was achieved by: (i) reducing the aggregate qualifying business gain by 4/9ths; and (ii) applying the then fixed 18% CGT rate to the chargeable gain remaining.

When the legislation was introduced in Finance Act 2008 the lifetime limit was fixed at £1m with no statutory provision for this limit to be increased. The limit was raised to £2m with effect from 6 April 2010. The emergency Budget 2010 announced an immediate higher 28 % rate of CGT and it was announced that:

  • with effect from 23 June 2010 the lifetime ER limit rises to £5m; and
  • that all ER qualifying gains are subject to tax at 10% (regardless of the taxpayer's marginal tax rate).

The 4/9ths reduction will cease to apply (as this would not have worked to arrive at the effective rate for higher rate taxpayers) and a specific 10% rate will be introduced for qualifying gains with respect to which ER is claimed.

ER gains can impact on the tax rate applicable to non qualifying gains where an individual's total taxable income is less than the upper limit of the income tax basic rate band. This is because ER gains are deemed to use up any spare basic rate band in priority to other gains meaning it is less likely that the 18% rate will be applicable to other gains.

An individual who used (or uses) his/her £2m allowance on qualifying disposals effected prior to 23 June 2010 has an additional £3m allowance which can be claimed on disposals effected on or after that date. An individual who will not utilise all (or any) of his/her pre 23 June lifetime allowance on qualifying disposals effected prior to 23 June 2010, will from that date have a lifetime allowance equal to £5m less any relief claimed.

Which disposals qualify for ER?

In general terms, there are three mutually exclusive qualifying disposal categories. For the purposes of ER, a business includes an interest in a partnership (with a trading limited liability partnership being subject to the same rules as a standard partnership). An ER claim on the disposal of the whole or part of a business or business assets cannot cover investment assets.

Qualifying category 1 – material disposal of business assets

Broadly, to qualify, a disposal must fall within one of three sub-categories.

  1. Disposal of the whole or part of a business
  2. The business must be owned by the individual throughout the period of one year ending with the date of the disposal. The definition of a disposal of whole or part of a business is not straightforward and Smith & Williamson would be pleased to advise in this area.

  1. Disposal of (or of interests in) assets in use for the purposes of the business
  2. The disposal of a business asset will only qualify for relief where:
  • the business ceases;
  • the business was owned by the individual throughout the period of one year ending with the date of cessation; and
  • the date of the disposal is within the period of three years beginning with the date of cessation.
  1. Disposal of (or of interests in) shares in or securities of a company

Shares or securities will only qualify for ER where the company is a trading company or the holding company of a trading group. In addition, the individual must be an officer or employee of the company, and the company must be the individual's personal company. A company will only qualify as the personal company of an individual where the individual is the holder of at least 5% of the ordinary share capital, and can exercise at least 5% of the voting rights by virtue of that holding.

To qualify for ER on the shares or securities, the company and the individual must generally meet the above conditions throughout the period of one year ending with the date of the disposal.

There are variations to this rule where the company is being wound up or where it leaves a trading group. We can advise on these situations.

Qualifying category 2 – disposal of settlement business assets

Trustees can also benefit from ER, but only in limited circumstances. In broad terms, the trust cannot be a bare trust (in such cases the beneficial owner may qualify for relief under the category 1 provisions) and:

  • the disposal must be of settlement business assets;
  • a beneficiary must have an interest in possession (other than for a fixed term) in the settlement business assets;
  • the beneficiary has to have unused lifetime ER allowance; and the beneficiary must agree to allow the trustees to use the available lifetime ER allowance (the amount used by the trustees reduces the amount available for the individual to use going forward).

Smith & Williamson can advise on the definition of 'settlement business assets' and the detailed qualifying conditions.

Where the trustees own shares in a company, ER will only be available where the company is a trading company or the holding company of a trading group.

For relief to be available the beneficiary must be a qualifying individual in his own right. This means they must have been an officer or employee of the company throughout the qualifying period and have had a personal holding in the company which met the specific 5% conditions with respect to voting rights and percentage interest in the company's ordinary share capital. The percentage holding of the trustees is irrelevant.

Therefore, as a result of the narrow wording of the ER provisions for trustees, a detailed review should be undertaken to consider whether the assets or shares owned in a settlement will benefit from ER.

Note that if the conditions are not met there may be simple steps that can be taken to improve the situation. Where there is a discretionary trust a solution might be to create a life interest over settlement business assets.

Qualifying category 3 – disposal associated with a relevant material disposal

To qualify for ER under this category, there must be both an 'associated disposal' and a 'relevant material disposal' that the associated disposal is connected with. A relevant material disposal is:

  • the disposal of the whole or part of the individual's interest in the assets of a partnership; or
  • the disposal of (or interests in) shares in or securities of a qualifying company.

An associated disposal is the disposal of an asset held personally by the individual that was used either in the trade of the partnership or of the company. The associated disposal must be made as part of the withdrawal by the individual from participation in the business carried on by the partnership or by the company (or a company which is a member of the trading group).

The provisions are complicated and relief is restricted in certain cases, chiefly where the asset (or part of the asset) has not been used for business purposes throughout the period of ownership.

Relief is also restricted where after 5 April 2008, for the whole or part of the period of business use, the availability of the asset was dependent on the payment of rent. Where an individual owns a property used by his/her partnership or personal company, Smith & Williamson can review whether the loss of ER that is caused by receiving rent is offset by other tax advantages.

How can Smith & Williamson help me?

ER is now worth a maximum of £900,000 to taxpayers, but the conditions are strict and merely holding business assets is not sufficient to qualify for relief. Specialist advice should be sought to ensure relief is maximised.

Smith & Williamson can review your current asset holdings to establish which qualify currently for ER. Where assets do not qualify we will advise on any actions which might improve the situation. Where assets do qualify we will warn against actions which, if taken, would lead to a total or partial loss of entitlement to ER.

ER will be a key relief for individuals that participate in family businesses and we would be happy to review the joint affairs of a couple or of a wider family unit.

At the start-up stage Smith & Williamson can suggest a business structure that will be optimal both with respect to tax efficiency (the ability to claim ER being only one issue that must be considered) and from a commercial point of view. We can also provide specialist advice on the sale of a business to ensure that the deal consideration is structured as tax efficiently as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Richard Mannion
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.