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24 March 2015
Entrepreneurs’ relief, joint ventures and partnerships
Last week’s Budget announced that the availability of Entrepreneurs’ Relief (ER) has now been restricted. With immediate effect, new measures will deny relief on a disposal of shares in a company that is not trading in its own right.
ER provides for a 10% effective rate of capital gains tax on the disposal of assets rather than the usual 18%/28%. The reduced rate applies to lifetime gains of up to £10 million.
In order to qualify for ER on shares, an individual is required to hold at least 5% of the ordinary shares and voting rights of the shares in a trading company (or holding company of a trading group). Until the changes announced, the ER rules around joint ventures enabled individuals with only a small indirect stake in the trading company to benefit from ER by holding shares in a management feeder or ‘pooling’ company.
The Government has distilled the definition of ‘trading company’ (and trading group) for ER purposes. The result being that ER will only be available to an individual if they hold 5% of the ordinary share capital and 5% of the votes in an investee company which has a significant trade of its own or is the holding company of a trading group.
As such, individuals who hold shares in a company which itself holds shares in a joint venture company will lose the benefit of ER if they dispose of their shares, unless the company is a trading company in its own right. It is not expected that relief will be denied where shares are held through a holding company of a trading group.
Entrepreneurs’ relief on associated disposals
The Government has today announced that there will be a further condition to be met in order to obtain ER on gains accruing on the disposal of personal assets that are used in a qualifying business. An individual will only be able to claim ER on these gains where they also dispose of at least 5% of their interest in the business. This is with reference to their shareholding in the company or assets in the relevant partnership, where the business is carried on through a partnership.
These new rules will apply for disposals on and after 18 March 2015.
The previous rules also included the requirement that the individual withdraws from the business at the time the assets were disposed of, however, there was no specified minimum requirement for the level of that withdrawal.
This is another measure which is intended to target perceived tax avoidance and so is not unexpected.
Entrepreneurs’ relief on goodwill
The Government has today announced that following consultation, proposals to be introduced in Finance Bill 2015 regarding ER on goodwill will be revised to allow ER to be claimed by partners in a firm who do not hold or acquire any stake in a successor company which is related to them when they transfer the business to the successor company.
These changes affect transfers on or after 3 December 2014.
The original proposals introduced in Autumn Statement 2014 are intended to prevent individuals from claiming ER on disposals of the reputation and customer relationships associated with a business (‘goodwill’) when they transfer the business to a related close company.
Whilst the original measures were introduced to remove a perceived unfair advantage available to proprietors of businesses who sell their business to a close company to which they are related in order to extract funds from the business at a special, low, rate of CGT rather than the normal rates of income tax and national insurance contributions, this is a welcome amendment to the legislation where an individual does not hold an interest in the successor company when they incorporate their business.