Restricting Entrepreneurs’ Relief on associated disposals : measure affects disposals on and after 18 March 2015

Restricting Entrepreneurs’ Relief on associated disposals : measure affects disposals on and after 18 March 2015

Wed 18 Mar 2015

The Budget introduces changes to Capital Gains Tax entrepreneurs’ relief that will affect individuals and members of partnerships who sell personal assets used in a business but do not, at the same time, dispose of a significant holding of shares in the company carrying on the business or of a significant share in the assets of the partnership carrying on the business.

The measure takes immediate effect and will affect disposals on and after 18 March 2015.

This new measure will mean that entrepreneurs’ relief (ER) will not be available to reduce capital gains tax (CGT) on gains which accrue on personal assets used in a business carried on by a company or a partnership, unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company, or a 5% share in the partnership assets.

ER does not usually apply to the disposal of personal assets used in a company’s or a partnership’s business. However, special rules allow ER on these assets when the disposal is associated with a partial or full withdrawal from the business or company. Previously there has been no minimum requirement as to the size of this withdrawal and it would seem that the Government’s view is that some taxpayers are using these rules to benefit from ER on personal assets when they are not making a meaningful withdrawal.

This measure ensures that at least a 5% stake in the business must be disposed of by a claimant in order to benefit from ER on an associated disposal. This is in line with the policy intention to encourage someone who is significantly withdrawing from a business to sell the personal assets being used to the buyer along with the business.

The Current Position

The relevant current ER provisions are set out at sections 169H to 169S of the Taxation of Chargeable Gains Act 1992 (TCGA). ER reduces the rate of CGT on the disposal of assets to 10% from the standard 18% (for a basic rate taxpayer) or 28% (for a higher or additional rate taxpayer). Section 169K provides special rules which allow ER on assets used in a business but owned privately by a participator (a shareholder or partner) in the business, providing those assets are disposed of as part of a withdrawal for participation in the business.

The proposed changes:

Legislation will be introduced in Finance Bill 2015 to amend TCGA to ensure that in order for a disposal of a privately-owned asset to qualify for ER, the claimant must reduce their participation in the business by also disposing of a minimum 5% of the shares of the company carrying on the business, or (where the business is carried on in partnership) of a minimum 5% share in the assets of the partnership carrying on the business.

We await publication of the draft legislation on 24 March for more details.

Author: Liz Hunter and for more information contact liz.hunter@mazars.co.uk

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