Chapter 3 Entrepreneurs Relief and investors relief Flashcards
ER - operation of the relief and lifetime limit
Entrepreneurs relief – this is available to taxpayers who give away or sell their business. The relief is available where there is a material disposal of business assets or a disposal which is associated with a material disposal. The relief is available to sole traders and partners selling the whole or part of their business and also company directors and employees disposing of shares. This must be claimed on or before the first anniversary of 31 January following the tax year of the qualifying disposal (31 January 2022 for 19/20).
Operation of the relief – the aim is to reduce the rate of CGT paid on qualifying disposals to 10%. Gains are eligible for ER up to a maximum lifetime limit which is currently £10 million. Relief is given at a 10% flat rate. Gains eligible for ER which are subject to tax at 10% are treated as using up the unused basic rate band in priority to other gains.
Lifetime Limit – relief can be claimed in respect of capital gains up to the lifetime limit. Individuals can claim relief for gains on multiple occasions until the time limit is reached. Gains which exceed the lifetime limit are taxed as normal gains. The lifetime limit is currently £10 million. The cumulative total of gains which have obtained relief must be deducted from the lifetime limit at the date of disposal to see if the lifetime limit remains.
ER - material disposals of business assets and associated disposals
Material disposals of business assets – ER is essentially available to taxpayers who make a material disposal of business assets. A business asset means the whole or part of a sole trader or partnership business, a disposal of an asset used in a business at the time the business ceases to be carried on or a disposal of shares in a company.
A disposal of shares or securities means that for at least 2 years prior to the disposal:
• The company is the taxpayers personal trading company and
• The taxpayer must work for the company
A personal company is one where the shareholder owns at least 5% of the ordinary share capital and is able to exercise at least 5% of the voting rights. The sale of securities (loan stock etc) is also eligible for relief, but this will only be the case where the loan stock is in a company for which the taxpayer is an employee or director and meets the definition of a personal company. The disposal of shares in a company that has ceased trading may also satisfy the material disposal condition. In this case the personal trading company and working conditions must be satisfied for the 2 years prior to cessation of trade.
Associated disposals – also qualifies for ER. An associated disposal is where:
• A taxpayer makes a material disposal of a business or shares
• As part of the withdrawal of the individual from the business, they make a disposal of an asset which had been used in that business and
• The asset disposed of had been used in that business for at least 2 years and has been owned by the individual for the 3 years prior to the disposal
Withdrawal from the business does not require full and complete disposal of the shareholding and can encompass a sale of some shares, provided the material disposal comprises the disposal of at least a 5% shareholding in the company.
Relief where a company ceases to be a personal trading company – in order for ER to be available on the disposal of shares it must be a close company. However, it may be that an individual originally held a shareholding of at least 5% but due to investment it falls below 5%. From 6 April 2019, relief is available for gains made before an individual’s shareholding is diluted. An election can be made for a deemed disposal and reacquisition of the shares immediately before the dilution, the election will result in a notional gain in respect of which a claim for entrepreneurs’ relief can be made.
The amount of the deemed sale proceeds is the value of the shares on the assumption that all of the share capital of the company had been disposed of at market value prior to the new share issue. This value will be the base cost going forward. When the shares are sold, the disposal will not qualify for ER if the personal company, conditions have not been met 2 years prior to the disposal.
Investors relief
Investors relief – available when an individual makes a disposal of qualifying shares in a trading company. Where a claim is made, the gains are taxed at 10%. When the claim is made it is treated as using up an unused basic rate band in priority to other gains. There is a lifetime limit of £10 million for each individual (separate from entrepreneur’s relief).
Conditions IR – shares must have been issued on or after 17 March 2016 and held for at least 3 years. The claim must be made by the first anniversary of 31 January following the tax year in which the disposal is made (31 January for 19/20).
Shares must be new ordinary shares subscribed for by the individual for cash, at the time the shares issued must have been unlisted. The relief is only available for non-relevant employees (directors or employees in the company). However, relief is still available if the individual becomes an unremunerated director or an employee of the company 180 days after the share issue. When transferring shares to a spouse, the spouse is treated as having subscribed to the shares at the original date of issue.
Gains eligible for relief – if any shares were not subscribed for but were purchases from another shareholder (other than a spouse) they will not qualify for relief and are excluded shares.
Chapter 4 – Relief for Capital Losses (P27 – P34)
A taxpayer will set capital losses against capital gains, losses must be set off against capital gains in the same tax year. You can offset capital losses in the same tax year in the most beneficial way. Capital losses on qualifying trading company shares, can be used as either capital losses or set against net income of the current or preceding year. If you have excess losses, they can be carried forward and set against gains in future years.
Losses carried forward – if a taxpayer has losses exceeding gains, the annual exempt amount will be lost and the excess loss is carried forward to offset against future gains, the current year will show nil in the computation. In future years the annual exempt amount is deducted before relief is given for capital losses brought forward. Capital losses brought forward are used in the most beneficial matter if there are gains charged to tax at different rates.
