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Relief map

A little while back, I wrote about the new entrepreneurs’ relief for capital gains tax. Most people will by now be aware that entrepreneurs’ relief is the replacement for business assets taper relief.

It delivers an effective 10 per cent tax rate on gains up to a cumulative lifetime limit of £1m in respect of qualifying disposals from April 6, 2008. The relief is given by reducing the gain by 4/9ths and applying the flat 18 per cent CGT rate to the reduced gain.

For example, a gain of £90,000 would be reduced by £40,000 to £50,000 and 18 per cent of this would be £9,000. This, of course, represents 10 per cent of the total gain.

So much for the basics. How does it differ from business assets taper relief? One of the most obvious points of difference is the lifetime limit of £1m applying to qualifying gains made since April 6, 2008. The old business assets taper relief had no limit on the gains qualifying for relief. There was also no minimum shareholding or active involvement test. This is what made the relief so appealing and relatively easy to access for passive investors, for example, in trading companies on the Alternative Investment Market and also for employees with shares in their employing companies from share schemes that represented an often miniscule proportion of the issued share capital.

Well, it is not quite so easy or straightforward under the new entrepreneurs’ relief. To qualify for the relief where the business asset in question is shares in a trading company, it is necessary for the businessowner to satisfy three key tests:

l The shareholder must hold at least 5 per cent of the shares in the company and the voting rights.

l The shareholder must be an officer or employee of the company andl The shareholder must have owned the shares for at least one year.

These conditions will deny entrepreneurs’ relief to some who could have qualified for taper relief, for example, those passive investors and employees with relatively small shareholdings in their company, say, through a form of employee share scheme that I referred to above. The protests on behalf of the latter category especially have been quite vocal but these protests have been to no avail.

It is interesting to note, however, that these conditions do not apply to partnerships or limited liability partnerships.

Especially where building a business for sale is an important objective in the minds of participants when setting up a business, this fact could influence the choice of trading medium.

Of course, for many businesses which are starting up, while eventual sale will be an aspiration, the more pressing issues will be around limiting liability, minimising tax and minimising administration costs. For any or all of these reasons, a partnership structure may not be most appropriate. However, where there is neutrality on these other issues, the partnership may look attractive.

Before leaving this subject, it is worth leaving you with a thought on an LLP. These are taxed in much the same way as ordinary partnerships with (as the name clearly implies) limited liability.

So, what else is different? Well, an area we have had to consider recently is that of associated disposals. As was the case with retirement relief, entrepreneurs’ relief is extended to apply to the gain on an associated disposal of an asset outside of a business, for example, a company, as long as the disposal takes place at the same time as the disposal of the shares in the company itself.

Perhaps even more important is that where a property has been used by a company or partnership, if that property has been let for a full market rent throughout the whole period of use, this will prevent entrepreneurs’ relief applying on its disposal. Where less than a full market rent is paid, then the gain otherwise eligible for relief is reduced to reflect the extent to which rent paid is less than the full market rent.

The period taken into account to determine whether commercial letting has taken place is not just since April 6, 2008. It would seem it will be necessary to look back over the entire period of ownership. It is hoped that there will be some softening of this position as the Finance Bill passes through to enactment.

For those operating in the corporate/business market, having an understanding of entrepreneurs’ relief and how it works is essential. This is especially so where the adviser is looking to engage the business owner on the important subject of their exit strategy.

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