Capital gains are normally taxed at 28% but the rate can be cut to 10% on up to £10 million of gains with entrepreneurs’ relief.  We have had a capital gains tax rate (CGT) of 28% for all disposals since 23 June 2010, except for basic rate taxpaying individuals.  So, how do you make sure you qualify for CGT entrepreneurs’ relief?

What tax rate applies to a capital gain that I make?

Individuals living in the UK have an annual exemption from CGT so that, currently, any gains of up to £10,600 are not taxable.  Any gains exceeding the annual exemption are taxed at one of three rates, 28%, 18% or 10% or a combination of these:

The main rate is now 28% and applies to all higher rate taxpaying individuals, trusts and estates.

Individuals on lower incomes may benefit from the lower CGT rate of 18% but, if any gains push them into the higher rate bracket, then the excess of that limit will be taxed at 28%.

The gains on disposal of some business assets may qualify for entrepreneurs’ relief and be taxed at only 10% if they do not exceed that person’s lifetime allowance.  The lifetime allowance was increased to £10 million on 6 April 2011.

What CGT benefits do business assets receive?

The so-called ‘entrepreneur’s relief’ was introduced for people selling business assets.  The relief, which reduces the effective rate of capital gains tax to 10%, has recently been increased for lifetime gains to £10 million.  On gains of £10 million this represents a maximum tax saving of £1,800,000!

Who can qualify for entrepreneur’s relief (ER)?

Tax relief is available to individuals and some trusts who sell all or part of a trading business that they have owned for at least 12 months up to the date of disposal.  The CGT rules for tax relief on business asset are complex and require disposal of the whole or part of a business, not just the sale of assets.  If the assets have not been used wholly for the business, or if the owner has received a rent for use of an assets in the business, then entrepreneur’s relief may be restricted.

What types of disposal obtain the relief?

The relief applies to capital gains on selling a self-employed business, assets that have been used in a business or personal trading company that has ceased business, or shares in a personal trading company.  A personal trading company is one in which the individual holds at least 5% of the shares and voting rights.  If an asset is not owned by the business itself, then entrepreneurs’ relief will only apply on its disposal if it coincides with the owner’s withdrawal from the business, or is disposed of within three years of the business ceasing.  There are extra conditions for limited companies in that the individual must be an officer or employee of the company as well.

When the whole business is sold to an unconnected third party it is usually straightforward to see whether the conditions for this tax relief have been met.  However, if only some assets are being disposed of, and perhaps to another member of the family (e.g. on retirement), then more care needs to be taken.  In such cases, the availability of ER on the disposal of land is likely to turn on whether there is a disposal of the whole or a part of a business.

The more difficult question for ER is whether or not a part of a business has been disposed of. This question will arise when only some of the assets of the business are sold. The important point here is that a disposal of a business asset, or assets, is/are not necessarily a disposal of the whole or part of a business.

Where it is not clear whether or not there has been a disposal of the whole or part of a business, it is critically important to establish all the relevant facts, so that a complete picture of the business, including the changes which have been made to it, can be built up for the period involved.  We can check whether ER is available and advise on changing the business structure to help you qualify for the tax relief.

How do I make sure that I can save tax?

All tax reliefs carry conditions and advice should be sought.  Entrepreneur’s relief has very complicated rules governing the definitions of disposals and qualifying business assets.  It is possible for us to check whether the tax relief is available and changes in ownership or business structure may secure these tax benefits.  We recommend that you ask us to check whether you qualify for entrepreneurs’ relief well before any disposal take place.

For further advice on information on business tax planning contact Alan Boby on 01295 250401 or email aboby@ellacotts.co.uk