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Matthew Hutton MA, CTA (fellow), AIIT, TEP comments on a Government relaxation of the rules originally proposed in relation to claims for Entrepreneurs' Relief and the payment of rent.  

Context

The new TCGA 1992 s 169P limits relief available on an associated disposal where (in particular),

'for the whole or any part of the period for which the assets which (or interests in which) are disposed of are in use for the purposes of the business, their availability is dependent on the payment of rent' (TCGA 1992 s 169P(4)(d))

FA 2008 Sch 3 Para 6, as a ‘transitional’, provides that,

‘Section 169P of TCGA 1992 has effect in a case where the period for which the assets are in use for the purposes of the business began before 6 April 2008 as if the reference in sub-section (4)(d) of that section to that period were to so much of it as falls on or after that date’.

In any event, where s 169P applies, a ‘just and reasonable’ apportionment is to be applied.  There has been some doubt as to the effect of rent paid for periods before 6 April 2008.  Happily, the matter appears to be resolved by HM Treasury Explanatory Note on the Finance Bill Amendments, albeit released rather late in the day.

Treasury Commentary

6. The amendment limits the period of payment of rent that can restrict the amount eligible for Entrepreneurs’ Relief so that only periods of rental after 5 April 2008 are taken into account.

7. So, for example, if rent had been paid for business use of the asset between the acquisition of the asset in January 2006 and 31 March 2008, but no rent had been paid for a later period, and the asset was disposed of in December 2009, there would be no restriction, by reason of rent having been payable, of the amount of gain qualifying for Entrepreneurs’ Relief, as the rental period falls wholly before 6 April 2008.

8. Alternatively, if rent had been paid from acquisition in January 2006 to the date of disposal in December 2009, the gain would be apportioned between the periods before 6 April 2008 and the period from that date. The payment of rent would not result in any part of the gain relating to the period before 6 April 2008 failing to qualify for Entrepreneurs’ Relief.  As far as the part of the gain relating to the period from 6 April 2008 was concerned, that payment of rent could result in a restriction of the amount of that gain qualifying for Entrepreneurs’ Relief, the amount of the restriction being dependent upon the extent to which the rent paid for that period was less than a full market rent.

9. So if the gain over the period of ownership of the asset from January 2006 to December 2009 were £144,000, and the rent paid in the period from April 2008 to December 2009 represented 25% of the full market rental, the amount of the gain qualifying for Entrepreneurs’ Relief (assuming all other conditions were satisfied) would be the whole of the gain relating to the period from January 2006 to 5 April 2008 (say 27 months) of £81,000, plus 75% of the gain of £63,000 relating to the period of roughly 21 months from 5 April 2008 to December 2009, giving a net amount eligible for Entrepreneurs’ Relief of £128,250.

(HMRC Resolution 7: Amendment 29)

Comment

To get relief on an associated disposal, the taxpayer must make a ‘material disposal of business assets’ as part of a withdrawal from participation in the partnership or company which uses the outside asset in its business.  Under Retirement Relief, the then Inland Revenue accepted that a reduction of 25% in the interest in the partnership or company was sufficient to constitute such a withdrawal.  I am rather assuming that the same would apply under Entrepreneurs’ Relief, though I have not seen any pronouncement from HMRC.  I shall generate a specific question.

This confirmation from HMRC of how the limitation on the disqualifying effect of the payment of rent applies gives a sensible result, in the context of the ‘just and reasonable’ test.

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