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Julie Butler looks at the recent increase in Entrepreneurs' Relief, and outlines potential alternative forms of CGT relief for businesses.

Introduction - Entrepreneurs' Relief

Entrepreneurs’ Relief (ER) was introduced by a “Darling U-urn” as a result of resistance to the removal of Business Asset Taper Relief (BATR) from 6 April 2008. The result was to deliver an effective 10% rate for up to the first £1 million of relevant 'lifetime capital gains'.

From 6 April 2010 that limit has increased from £1 million to £2 million. The fundamental difference between BATR and ER is that essentially, ER only applies to the disposal of the whole of the business as opposed to a part. This can mean ceasing the business. Furthermore, the asset(s) attracting relief must have been owned for at least 12 months prior to disposal. 

ER is considered to be on the lines of “Retirement Relief” which was phased out several years ago.

Other Reliefs

The increase of the limit to £2 million has encouraged a review of other Capital Gains Tax (CGT) business reliefs.

Rollover relief is still available.

There is also targeted support for small businesses through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

whilst Entrepreneurs’ Relief has a cumulative 'lifetime allowance', it can be claimed on multiple occasions and planning will be involved on instances to rollover, and times to claim the relief. Holdover relief is also available for family transfers of business assets.

There are many who consider that the 'non-business' rate of Capital Gains Tax of 18% might not remain for long. It is therefore considered that taxpayers will look for opportunities to restructure investment portfolios. It is anticipated that since 5 April 2010, there will be lots of activity in redesigning the range and mix of investments held.

Development Land

For those with development land that is about to be sold, there will be many trying to see how they can use ER on these disposals so as to achieve the 10% rate AND the £2 million limit which will present fresh opportunities.

By itself, a disposal of let property will not qualify for ER. There must be a disposal of the whole or part of a trading business and commercial property letting is not a trading activity. However, if the property is let to a trading partnership of which the taxpayer is a member, or to a trading company of which the taxpayer is an officer or employee, the taxpayer may be entitled to a measure of relief on disposal of the property if that disposal is associated with a disposal of interest in the partnership, or of shares in the company and that other disposal meets all the conditions for the relief.

Further Aspects of Entrepreneurs' Relief

For each category of ‘qualifying business disposal’ capital gains and losses are computed for all assets comprised within the disposal but excluding gains or losses arising on assets which are not ‘relevant business assets’. Any capital losses arising have to be fully utilised, i.e., they must be set against the full amount of gains arising on the same disposal before relief is applied.

One of the main problems with ER, however, is that generally one has to cease the business. It may be possible, for instance, to transfer the aforementioned development land into a separate entity – such as a new partnership or even a trust – and then trade for at least one year in that business, but one would, however, need to make sure there was a true business and that all the new owners or beneficiaries were involved in the new trade.