Chris Williams outlines the benefits of the new entrepreneurs’ relief rules on reinvested gains that the Chancellor announced in the December 2014 Autumn Statement.
One of the great historic disadvantages of entrepreneurs' relief (ER) has been the lack of any alternative when making a reinvestment in new business shares. A business owner could either claim ER or relief for reinvestment in a new business if that business qualified for a relief, such as under the enterprise investment scheme (EIS).
The problem this raised was that the relief could not be secured unless some tax was actually paid, reducing the funds available for use in the new business. Not only that; the future availability of ER would depend on the nature of the new business, not only at the point of reinvestment but throughout its life right up to the point of eventual disposal.
There is to be some relaxation of the general rule that ER must be claimed in relation to the original disposal or cannot be claimed at all. This change only applies to reinvestments into EIS shares and social investment tax relief (SITR) investments.
A quick summary of entrepreneurs' relief
ER is available to an owner (sole trader or in partnership) or working shareholder who owns at least 5% of the company or obtained the shares through the enterprise management incentives (EMI) scheme. The business must be a qualifying trade and have been carried on continuously for at least twelve months, ending on the date of disposal or cessation of business in the three years immediately preceding the disposal.
ER must be claimed no later than the second 31 January following the end of the year of disposal, so for gains in the year ending 5 April 2015, the time limit will be 31 January 2017.
What's changing?
If you disposed of your business or shares on or after 3 December 2014, if the disposal is eligible for ER and you claim EIS or SITR relief you will be able to claim ER on the gain held over.
You don't claim ER on the initial disposal, the only claim you make now is for the reinvestment relief. The normal EIS and SITR time limits apply, so you can match the gain with assets acquired in the year before or the three years after the disposal. To get the relief you don't have to reinvest all the sale proceeds, only the gain, and if you don't reinvest all of the gain you can still get relief on the amount actually invested.
EIS and SITR
EIS reinvestment relief is only available on shares, but SITR, which is designed to promote investment in social enterprises, applies to loans as well, provided that the loan is correctly evidenced as a security.
Claiming ER on the first disposal of replacement assets
You will only get one chance to claim ER and that chance comes when you dispose of the replacement asset, unless you reinvest again in qualifying EIS or SITR investments. The time limit will be shorter than the normal ER time limit, i.e. it is 31 January following the end of the year in which the replacement asset is disposed of.
If you don't claim ER on the first disposal of any replacement assets you lose the chance to claim ER on any future disposal. If you don't dispose of all the replacement assets in one go but do claim ER on the first disposal you will still be able to claim ER on subsequent disposals.
Practical Tip:
EIS shares have to be held for a minimum period, usually three years from issue, to secure their relief. If the EIS relief conditions have been met in full ER will still apply on the held-over gain even if the EIS company's business has changed so that it would not itself qualify for ER.
