How to benefit from Entrepreneurs’ Tax relief
Entrepreneurs’ relief and business property relief are two extremely valuable reliefs available to business
owners. Whilst many advisers are familiar with the way these reliefs apply to company shares, they must
also be aware of how the rules and conditions apply to unincorporated businesses.
Entrepreneurs’ Tax relief
Entrepreneurs’ relief (ER) has now been with us for over a decade. The mechanics of the relief have been tinkered with over the years but have always sought to apply a 10% tax rate to qualifying gains, subject to a lifetime limit. As of 2019/20, the lifetime limit is £10 million.
Entrepreneurs’ relief can be worth up to £1 million in reduced capital gains tax per individual, i.e. (20% – 10%) x £10 million.
The way that ER applies to trading company shares is generally well understood, e.g. the ‘personal company test’, despite recent complications – including the extension of the minimum holding period from one year to two years, and the introduction of elections designed to protect minority shareholders. However, ER also applies to a material disposal of a business, or part of a business.
The upheaval of the dividend tax regime from 2016 onward means that being a sole trader (or using a
partnership) can actually be more tax efficient than using a single director-shareholder company at higher profit levels, depending on the level of income required. As a result, it is likely that advisers will see an increase in disposals of unincorporated businesses that require ER to be considered.
Entrepreneur Tax two year rule
In order for ER to apply on the disposal of a business, the individual must have owned the interest for at least 24 months, ending with the date of disposal or the date that trading ceased in anticipation of being sold.
There is no requirement that the business be a going concern when transferred. Any assets that are retained but were in use by the business at the date of cessation can
qualify for ER as a post-cessation disposal as long as they are disposed of within three years of cessation.
It’s relatively easy to identify the disposal of the whole of a business. In that instance the practical challenge will be to establish whether the business activity itself qualifies for ER, and whether the other conditions are met. However, if only part of a business is sold things are more complicated.
There is no automatic entitlement to ER for straight sales of individual business assets, or a collection thereof.
Rather, it must be demonstrated that what is being disposed of constitutes a separate activity. In particular,ER will be denied if the essence of what is happening is a simple downsizing exercise.
John owns two shops in neighbouring towns. These use a single warehouse, sell the same items, have the same branding, name and profit margins. Staff are required to work between sites. In the event of a sale of one of the shops, it is likely that HMRC would seek to deny relief as it is not a sale of a distinct part of the business.
Jane owns a jewellery shop and a green-grocers on the high street. There is no interdependence other than Jane’s management. A sale of either business would probably qualify for ER, subject to other conditions being met, as it is easy to distinguish between the two business activities.
Note that a disposal of an interest in the business if a new partner joins can qualify for ER.
HMRC’s Entrepreneur tax view and conflicting case law
HMRC guidance in their Capital Gains Manual at CG64030 onward suggests the ‘interference’ approach
is adopted, i.e. the extent to which the disposal interferes with the ongoing business. However, in Gilbert T/A United Foods  (TC01542), the First-tier Tribunal opined that the interference principle, established in the earlier case of McGregor v Adcock  (TC692), only applied in the specific circumstances of that case, namely that of farmland.
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