How can I maximise Entrepreneur’s Relief (ER)?
14th August 2018 by Robin Beadle
One of the “Laws” of the unintended effects is Wethern’s Law which is more popularly known by the truism that “Assumption is The Mother of all Screw-ups”. In other words, Wethern’s Law (of Suspended Judgement) exhorts us to check and recheck, as the facts upon which we rely, and on which everything else revolves, have a habit of becoming untrustworthy. This is something that anyone who has been in business (or tax) should learn.
In the real world where business and taxation collide, the law of unexpected consequences can be triggered by changes in rules, by badly drawn legislation (giving rise to the proverbial loophole) or by your own circumstances no longer fitting in, exactly as you once thought they ought. Nowhere is this more apparent than when you come to dispose of a business – either deliberately through retirement, sale or succession planning - or unexpectedly as a result of a sudden (maybe enforced?) sale, or death.
For relief against Capital Gains Tax, the tax relief most heavily relied upon is Entrepreneur’s Relief (ER) which reduces the capital gain on such qualifying disposals from 20% down to 10% (subject to a lifetime limit of £10 million) although tax reliefs exist for roll-over and hold-over as well. For Inheritance Tax (which can apply on certain gifts and not just as a result of death) the relevant relief is Business Property Relief (BPR).
For example, the method of ownership of business property can be a major factor in how much tax relief you could receive on a planned or unplanned disposal of a business. In years past, good tax planning advice was often for partners or directors to hold business property personally (outside the partnership or limited company), with the owner charging rent to the business for the use of the asset Holding the property personally was also good practice where different people were bringing different levels of capital to the business or the business’s sustainability was of less sound footing (and therefore keeping personal ownership of the property protected the asset).
But disposing of a business may not be at the forefront of every business owner’s thoughts as they seek to grow their business and they may not be aware that what was good practice then is less so now and the rules surrounding ER are somewhat tighter than the earlier Business Asset Taper Relief. For example, the payment of rent for the use of a business property will limit or even fully deny ER on that asset. Restrictions to ER also apply for any non-business use of an asset during its period of ownership (for example an area above a shop being used for residential purposes rather than as surplus business storage).
If you have a “tainted history” connected with a property that the business uses, you might therefore consider whether greater ER at a future date could be obtained by transferring ownership of an asset into the company or partnership which would then give a clean start to owning the asset
For ER, the property being disposed of must have been used for the purpose of the partnership’s/company’s business for at least the whole year up to the disposal date. There is also a new minimum three year ownership period if assets were acquired in recent years. The disposal of the property must take place either at the time the business is sold or ceases or within the period of three years after this date (known as an associated disposal), provided not used for another purposes post business cessation/sale.
There is an added benefit in holding the property within a business. By increasing the level of business assets on the balance sheet, you could also proportionately reduce the size of any non-business assets held (e.g. cash and sundry investments) which is another factor that has to be taken into account when claiming ER or BPR.
For limited companies share ownership is another issue, especially with jointly owned (husband and wife) companies. The current rules for Entrepreneur’s Relief are that to qualify the individual must be an officer or employee of the company, hold 5% of the ordinary share capital and can exercise at least 5% of the voting rights. This is on an individual level, and not in association with a spouse, family member or any form of settlement. Therefore, a husband and wife team owning 9% of the shares jointly will not qualify at all, but one of them owning 5% and the other 4% would give a measure of relief – but the best result here is for all the shares to be held by one individual.
So is it time to review your asset ownership structure or your longer term exit routes to ensure that your expected tax reliefs would be forthcoming if you were to sell? If not, Wethern’s Law could be lurking in the background to trip you up. But just before you rush to change your property or share ownership structure, remember that gifts or sales of assets to a business or individual can themselves give rise to capital gains tax implications, or potentially even to issues with settlement or VAT legislation.
I’m pretty sure that there is a name for that law as well…. but it might not be printable.
For more information on any of the above points, please contact Robin direct.
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