Chris Williams looks at another of the traps laid in this year’s Budget affecting capital gains tax entrepreneurs’ relief.
For members of trading partnerships and working shareholders of trading companies, the basic capital gains tax entrepreneurs’ relief only applies to disposals of their actual shares in the partnership or the company. If you personally own an asset used by your company or partnership, no entrepreneurs’ relief is available if you dispose of the asset on its own. This mirrors to some extent the treatment of individual business owners or sole traders.
There is, however, an additional relief for personally-owned business assets, but it is only available if you also make a ‘material disposal’ of some or all of your share in the partnership or shares in the company. Then you can claim entrepreneurs’ relief for the ‘associated disposal’ of your personal business asset.
What’s changed?
Until 18 March 2015, there was no minimum size of the material disposal. Now a 5% minimum disposal requirement applies before a disposal of a personally-owned business asset can obtain entrepreneurs’ relief.
The other conditions for an associated disposal remain in place, i.e. broadly that the material disposal must take place before, or at the same time as, the associated disposal, and the material disposal must take place either while the partnership or company is still trading or within three years after the trade ceased.
How does the 5% minimum work in a partnership?
It is not enough that you dispose of 5% of your own interest. The minimum requirement is that you dispose of 5% of the entire partnership in the material disposal.
Company shares
If you are a shareholder the 5% minimum disposal applies in the same way; it is shares entitling you to 5% of all the company’s assets and 5% of the voting rights.
Company securities
If you own securities in a company that is your ‘personal company’ (i.e. one in which you also own at least 5% of the company’s ordinary share capital and voting rights) you can also claim associated disposal entrepreneurs’ relief if you dispose of at least 5% of the securities of the company. ‘Securities’ is very widely defined and includes both rights to acquire shares and loans that are formally recognised as a tradable security issued by the company.
Entrepreneurs’ relief still applies to material disposals of less than 5%
This is an important point: it is only associated disposals that suffer from the 5% minimum disposal requirement. So a member of a partnership can dispose of any size of share and still claim entrepreneurs’ relief on that disposal. Similarly, a company shareholder can dispose of less than any number of shares. But if you are in that position, remember that you mustn’t let your shareholding fall below 5% or you will lose entrepreneurs’ relief on future disposals.
Minimum disposal requirement will trap partners who sell up completely
The 5% minimum disposal requirement doesn’t only apply to you if you reduce your interest, but also if you don’t sell it all. Even if you are disposing of your entire interest in the partnership you cannot claim entrepreneurs’ relief on an associated disposal unless you also dispose of at least 5% of the partnership.
Practical Tip for partners :
If your interest in the partnership has been reduced to below 5% you may be able to introduce the asset to the partnership in exchange for an increased share. So long as your share recognises the full value of the asset you can then effectively recover entrepreneurs’ relief on the asset’s value. Just don’t try this tactic the week before you retire or sell out completely, or you risk being challenged by HMRC.
