Anderson Shaw

Chancellor Increases Qualifying Amount for 10% ‘Entrepreneurs’ Relief’ to £10M 28.03.2011

In the Budget Statement on 23rd March 2011, the Chancellor included the following good news for Business Owners:

Entrepreneurs’ relief — Legislation will be included in Finance Bill 2011 to increase the lifetime limit on gains qualifying for entrepreneurs' relief from £5 million to £10 million with effect from 6 April 2011. Subject to satisfying certain conditions gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for entrepreneurs’ relief. Qualifying gains are taxed at a rate of 10 per cent. There are no other changes to the rules or conditions relating to entrepreneurs' relief.

The following simplified notes on the Scheme have been extracted from documents available on the HMRC website.

What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief reduces the amount of the capital gain to be taxed on a disposal of qualifying business assets, as long as the Claimant has met the qualifying conditions throughout a one year qualifying period either up to the date of disposal or the date the business ceased. From 6th April 2011 the relief is subject to a lifetime limit of £10,000,000 of qualifying capital gains for each individual.

Who Can Claim Relief?
Entrepreneurs’ Relief is available to individuals and some trustees of settlements, but it is not available to companies and personal representatives of deceased persons. The Claimant has to meet the relevant qualifying conditions throughout a period of one year. The year ends with the date of disposal of the asset, or an interest in the asset for which relief is claimed, or the date when the business ceased, if that was earlier.

What Types of Asset Qualify for Relief?
• assets used in the business (such as goodwill and business premises but excluding any assets held as investments) comprised in a disposal of the whole or part of the business, whether the Claimant operated the business on his own or in partnership;
• assets (excluding any assets held as investments) that were in use for the business, or a partnership of which the Claimant was a member, and were disposed of within the period of three years after the time the business ceased;
• assets consisting of shares in a ‘personal company’. The shares must be disposed of while the company is a trading company or within three years from the date it ceased to be either a trading company;
• assets owned by the Claimant personally but used in a business carried on by either a partnership of which the Claimant is a member, or by the Claimant’s personal trading company, as long as the disposal is associated with a disposal of the Claimant’s interest in the partnership or shares in the company.
 
Disposal of Shares
If the business is owned by a company in which the Claimant sells shares, then throughout the qualifying period of one year the company must be:
• the Claimant’s personal company (a company in which the Claimant holds at least 5% of the ordinary share capital and that holding gives him at least 5% of the voting rights in the company) and
• either a ‘trading company’, or the holding company of a ‘trading group’ and
• the Claimant must be either an officer or employee of the company (or an officer or employee of one or more members of the trading group).

Husband and Wife or Civil Partners
Husbands and wives, and civil partners, are treated separately for Entrepreneurs’ Relief. Each person is entitled to relief up to the maximum lifetime limit of £10,000,000 qualifying gains, provided the relevant conditions are satisfied. Where the Claimant holds shares jointly with another person, whether that is a husband, wife, civil partner or someone else, in deciding whether the company is the Claimant’s personal company he is treated as holding the appropriate proportion of the total holding and associated voting rights. For example, where a husband and wife own the entire issued ordinary share capital of a company jointly, they are each treated as holding 50% of the shares and 50% of the voting rights. Note however, the officer/employee condition in the Disposal of Shares above.

Important Note
The above is written as a brief guide only to Entrepreneurs' Relief. More details are available on the HMRC’s website at:

http://www.hmrc.gov.uk/cgt/businesses/reliefs.htm

Anderson Shaw recommends that potential Claimants take detailed advice from a tax expert on Entrepreneurs' Relief as part of the decision process relating to a business sale.