Wethern’s Law, one of a long line of laws of the unintended, states that “Assumption is The Mother of all Screw-ups” and is probably understood as a truism by anyone who is or has ever been in business. 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.
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 18% or 28% down to 10% (subject to a lifetime limit of £10million) although additional or alternative 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 relief is Business Property Relief (BPR).
For example, the ownership of business property can be a major factor in how much relief you would receive on a planned or unplanned disposal of a business. In past years, legislation concerning the former Business Asset Taper Relief was more relaxed and it was good tax planning to often hold property personally – outside of a partnership or Limited Company – as the owner could then charge rent to the business (payable without suffering National Insurance). 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 as disposing of a business may not be at the forefront of every businessman’s thoughts as he seeks to grow his business and,provide for his family, he 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 deny the current ERs relief on that asset. Restrictions to ERs relief 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 relief at a future date could be obtained by transferring ownership into the Company which would then give a clean start to owning the asset
For ER’s relief, the property being disposed of must have been used for the purpose of the partnership’/company’s business for at least one year The disposal of the property must take place either at the same time as the business is sold or ceases or within the period of one year before and three years after this date (known as an associated disposal).
There is an added benefit in holding the property within a business rather than outside as well. 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 further information on any of the above points or to discuss your affairs generally, please do not hesitate to contact Robin Beadle.
Please note that this article was written before the March 2015 Budget and the rates and legislation are correct at the time of going to press