- a sole trader sells all or part of the business or assets after the business has ceased;
- a partner disposes of all or part of their share of the business, or an asset after making such a disposal; or
- a shareholder disposes of shares, or an asset used in the business, again, after making such a disposal.
Example:
An opportunity too good to lose?
Farmer Keith owns two 40-acre fields,
bought years ago for their agricultural value of £2,500 per acre. Blueline
Builders obtain planning permission for a housing development on one of the
fields and offer him £5 million for it. If he simply sells them the field he
will not get ER and pay 28% CGT on £4.9 million, £1,372,000, whereas if he
could get ER the tax bill would ‘only’ be £490,000.
If Keith was intending to retire
anyway he could cease farming and dispose of the development land after
cessation (he would not have to dispose of any other assets: he could cease
trading and keep the remaining land for other purposes, such as leisure, just
not farming.) He must not keep the business going in any shape or form that is identifiable
with the existing business. If he doesn’t cease trading before selling, he
doesn’t meet the conditions for ER.
Therefore if the offer came in and the
developer wanted an agreement before the harvest was in, Keith would have to
decide whether it was really worthwhile hanging on until the harvest. He could
not, for example, sell the land and lease it back in order to obtain the
harvest, as that would mean there was no cessation of business.
Creating the conditions for ER
If Keith wants to continue in business he needs to dispose of all or part of the business. This could be to his wife, another family member or a company set up for the purpose.
A disposal to a spouse or other relative has to give them a share in the business, but they don’t have to acquire a major share. Keith can make his wife a partner with as little as a 1% share in the business and he doesn’t even have to put any of the land into the partnership (though he should consider doing so as land used by the business but owned personally only attracts 50% IHT business property relief).
Making his wife a partner is a disposal of that 1% share in the business and enables Keith to claim ER on selling the land, but only after he has completed all the formalities of making his wife a partner.
If there is no individual to share the business with, Keith can set up a company to take on a share in the business instead. The company could be a partner with Keith or he could transfer the continuing business to the company to run the business, with or without the land he wishes to retain, and then sell the development land afterwards.
Practical Tip:
If you expect to make a gain that will use up your £10 million ER lifetime allowance, you can share the business with a spouse or relative and let them use their ER allowance as well. But this isn’t last minute planning; they will have to own their share of the business for a year too.
