Where the relevant criteria are met, Entrepreneurs' Relief can mitigate the charge to capital gains tax (CGT) arising on the disposal of certain business assets on or after 6 April 2008 by qualifying individuals (including some trustees). The relief operates by reducing the rate at which the charge to CGT is calculated on a qualifying disposal from 28% or 18% to 10%.
The relief was originally limited so that it could be claimed only for lifetime disposals made by an individual to a maximum aggregate value of £1 million. This lifetime limit has increased progressively so that the relief can now be claimed by an individual making lifetime disposals with a total maximum value of £10 million. The lifetime limit was last increased on 6 April 2011 and, in his 2014 Autumn Statement, the Chancellor indicated that further limitations would apply to the availability of the relief, namely that it could no longer be claimed on gains arising from the disposal of goodwill by a trading business or partnership to a related close company.
While the 2014 proposal has not come to fruition entirely, on 18 March 2015, the Chancellor did announce that the relief will only be available to those 'selling genuine shares in businesses'. This will be the subject of further clarification but initially it appears that the Chancellor's comment relates to the availability of the relief in the following circumstances:
It is currently possible for individuals to claim the relief on the disposal of assets owned by them personally (ie not by the business) if the assets are used by a trading company or a partnership in which they hold a 5% interest and of which they have been a partner, officer or employee for at least the full year preceding the disposal. The individuals must show that the criteria are met and that the disposal of the personally-held assets and the interest in the trading company or partnership are connected, as part of their withdrawal from the business.
An example of a scenario where an 'associated disposal' would arise is if a landowner disposes of land, owned personally by him, which is run under a farming business tenancy to which he is party. The landowner could claim the relief on disposal of the land if at the same time he also gave up all or part of his interest under the farming business tenancy.
The relief can be claimed on a disposal of the land if the criteria are met, even if the landowner relinquishes only a small percentage of his interest under the farming business tenancy. The 2015 Budget now provides that the landowner will need to relinquish at least 5% of his interest in the farming business (company or partnership) in order to qualify for the relief.
Disposals by management companies
It has been common for partners, officers or employees holding less than a 5% interest in the relevant partnership or trading company to group together to form a 'management company' to hold their interest so as to qualify collectively for the relief and meet the criteria when the management company disposes of all or part of its interest. Typically, the management company as an isolated entity does not have any function other than to hold the interest in the structure on behalf of the individual investors.
Following the implementation of the 2015 Budget provisions, the relief will not be available on a disposal by a management company in circumstances where it is merely a member of a joint venture company or partnership. Instead, for the relief to apply, the management company itself must be a trading company.
Circumstances in which the relief will continue to apply
Despite these amendments, the relief continues to be applicable in the same broad circumstances. Subject to the limitations announced in the 2015 Budget and provided the criteria apply, the relief will still be available where an individual disposes of his shares or securities in a company that has ceased trading (including if the disposal is made as a result of his withdrawal from the business), provided the disposal occurs within three years of the cessation of business. Where the whole or part of a trading business, not including the company's investment assets, are disposed of by an individual who owned the business for the year preceding the disposal (including if the disposal is made as a result of the individual leaving the business). The individual might be a sole trader or member of a partnership. If a company has ceased trading, the disposal must take place within three years of the cessation date.