Entrepreneurs’ Relief – Incorporation under attack

  • By Mark Morton
  • 30 July 2015 00:00

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ER changes

The Coalition Government's last Budget made a number of changes to Entrepreneurs' Relief (ER) in 2014/15.

Incorporation under attack

In order to stop what HMRC describe as the '...unfair advantages on incorporation...', two changes were made to:

  • deny ER on intangible assets which are transferred to a close company which is related to the transferring business; and
  • restrict corporation tax relief when a company acquires intangible assets from related individuals on the incorporation of a business.

If, as part of a qualifying business disposal, a person disposes of goodwill directly or indirectly to a close company and, at the time of the disposal, that person is a related party in relation to the company and that person is not a retiring partner, the goodwill disposal will not qualify for ER.

This change applies for incorporations on or after 3 December 2014.

Associated disposals

The original ER rules did not specify any proportion of partnership interest or shares which had to be disposed of to allow an associated disposal to qualify for relief. The rules have been changed so that 5% of the partnership interest or shares need to be disposed of in order for an associated disposal to qualify for ER. These rules came into effect on 18 March 2015.

ER and deferral

Provided that certain conditions are met, ER will be due on gains deferred into EIS and the new Social Investment Tax Relief which come back into charge. Those conditions are that:

  • the gain accrues in a case in which the original gain would, but for the operation of the relevant rules, have accrued on a relevant business disposal;
  • a claim for ER is made on or before the first anniversary of 31 January following the tax year in which the deferred gain comes back into charge; and
  • the deferred gain which comes back into charge is the first gain to accrue in the case as a result of the operation of these rules.

The new rules apply to cases where the original gain arose on or after 3 December 2014.

ER and joint ventures

The ER rules originally catered for relief for joint ventures in specific circumstances. HMRC feel that this rule has been abused and so the definition of a 'trading company' and 'trading group' are changed. Trading activities of joint venture companies in which a company holds shares will no longer be treated as carried on by the shareholder company directly when determining whether a company is a trading company or group. Similarly any activities carried on in its capacity as a member of a partnership are not trading activities. These rules came into effect on 18 March 2015.

The changes mean that, in order to qualify for ER, the company in which shares are disposed must be a trading company, or holding company of a trading group, in its own right.

As ER is such a valuable relief, you may wish to ensure that clients are up to date with these changes.

P.s. Watch my webinar 'Review of Entrepreneurs Relief' which is available from 31 August 2015.

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