The New Entrepreneurs' Tax Relief

In the Pre Budget Report in October 2007, the Chancellor, Alistair Darling, announced a series of changes to the CGT regime for individuals and trustees. These changes included the abolition of taper relief and indexation relief and the introduction of a single rate of CGT of 18%.

On 24 January 2008, in response to pressure from the business community, the Chancellor announced a new ‘Entrepreneurs’ Relief’. The first £1m of gains qualifying for relief will be charged at an effective rate of 10%.

Gains in excess of £1m will be charged at 18%. An individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains qualifying for relief.
HMRC have given an example of how the relief will work.

Example
Sarah sells her trading business and realises gains of £450,000 (before Entrepreneurs’ Relief). She has made no other claims to the relief and the whole of the gains are eligible for relief. If she claims the relief the gains of £450,000 will be reduced by 4/9ths (£200,000) and £250,000 of the gains will be liable to CGT (subject to deduction of any allowable losses and the annual exempt amount).

Conditions for the new relief to apply

The conditions for the new relief will be based broadly on the old Retirement Relief but the new rules are designed to be simpler:

• there will be no minimum age limit; and
• the relief will be available where the relevant conditions are met for a period of one year.

The relief will apply to gains arising on the disposal of the whole, or a part, of a trading business that is carried on by the individual, either alone or in partnership. Where a business ceases, relief will be available on gains on assets used in the business and disposed of within three years of cessation.

The relief will also apply to gains on the disposal of shares in a trading company, or holding company of a trading group, provided that the individual making the disposal:

• has been an officer or employee of the company, or of a company in the same group of companies; and
• owned at least 5% of the share capital of the company and that holding enables the individual to exercise at least 5% of the voting rights.

The terms 'trading company', 'holding company' and 'trading group' will have the same meaning as they had for taper relief purposes.

Where an individual qualifies for the relief on a disposal of shares, relief will also be available in respect of any 'associated disposals' of assets which were used in the company, or group’s, business. A similar rule will allow relief on an associated disposal by a member of a partnership who is entitled to relief on the disposal of their interest in the assets of the partnership.

Another HMRC example illustrates this point:

Example
If a company director who owns the premises from which the company carries on its business sells the premises at the same time as he sells his shares in the company, the sale of the premises may count as an 'associated disposal' and any gain attract Entrepreneurs’ Relief. The relief due on an associated disposal will be restricted where the asset in question was not wholly in business use throughout the period it was owned.
Trustees will also be able to benefit from the relief if a beneficiary of the trust with an interest in possession relating to those assets is involved in carrying on the business in question, personally or as a partner. In the case of shares, the beneficiary must qualify as an officer or employee of the company in question.

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