In addition to the changes restricting the application of entrepreneurs’ relief to management company structures and transfers of goodwill, the Chancellor has also restricted the availability of ER on associated disposals of assets.
ER is a business tax incentive and therefore applies, subject to conditions, on sales of:
- unincorporated businesses or interests in partnerships carrying on businesses; and
- shares and securities in unquoted trading companies.
However, it is relatively common for assets used in a business, including premises, to be owned by a shareholder or partner in their personal capacity. When the business or company is sold, these assets are generally also sold. The ER legislation recognises this by extending ER to “associated disposals”, that is, disposals of personal assets used in the business if the disposal is associated with the disposal of all or part of the individual’s interest in the business, partnership or company. However, the legislation does not specify a minimum level of business or share disposal and it could be only a tiny proportion of the individual’s holding. The Government is concerned that some taxpayers have been claiming ER on associated disposals of personal assets without any significant reduction in their participation in the business.
With effect from 18 March 2015, ER will no longer be available for associated disposals unless the taxpayer is disposing of at least a 5% stake in the business or company and there are no arrangements for the taxpayer or any connected person to buy back what is sold or otherwise to increase his or her stake. In the case of a share sale, the taxpayer must dispose of shares constituting at least 5% of the company’s ordinary share capital and carrying at least 5% of the voting rights. This is the level of ownership generally required to qualify for ER on shares, but it is worth noting that, provided a taxpayer satisfies this share ownership requirement, he or she qualifies for ER on the share disposal even if less than 5% is sold. The requirement to sell at least 5% applies only to enable the associated disposal of personally held assets to qualify for ER, an odd distinction and one presumably triggered by perceived abuse of the relief by some taxpayers.
The Budget measures also included a potential expansion of the availability of ER to spin-out companies.