Entrepreneurs' relief - how to qualify

Entrepreneurs' relief is a welcome concession to the small business community who felt that the loss of business taper relief was an unfair tax on those selling their businesses to fund their retirement.


As such, the new relief is a kind of resurrection of the old retirement relief, which was phased out between 1998 and 2003. The new rules, enacted on April 6, are simpler. There is no minimum age limit for entrepreneurs' relief (under retirement relief you generally had to be 50 plus to get relief). And in general, entrepreneurs' relief will be available where the relevant conditions are met for a period of one year, instead of the retirement relief qualifying period of up to ten years.

However, the maximum tax saving that can be achieved under entrepreneurs' relief will be £80k, whereas an individual able to claim maximum retirement relief could see their tax liability reduced by £250k. Of course, with the business taper relief there was no upper limit and billion pound gains were being taxed at 10% with the private equity industry benefiting the most.

At the time of writing, it is unlikely that anyone can now start making new arrangements to try and benefit from business asset taper relief by crystallising any gain before April 6. As such, all deals should be at a well advanced stage.


We continue with a look at the draft legislation (including extracts). Of course it should be remembered that we have not seen the final act yet and there may be some changes to come. Therefore, we strongly advise that professional advice is taken before taking any action. When the new act is published we will look at it immediately in detail, and any particularly relevant changes will be published on our blog at http://www.business-sale.com/blog


How to access Entrepreneurs' relief

Entrepreneurs' relief can be applied to qualifying individual or trust business gains. It has to be claimed by the individual or, in the case of a disposal of trust business assets, jointly by the trustees and the qualifying beneficiary. The deadline for making the claim is the first anniversary of the 31st January following the tax year in which the qualifying business disposal is made.

For a gain to qualify for Entrepreneurs' relief, the disposal must meet the qualifying business asset disposal criteria. Generally the qualifying conditions for Entrepreneurs' relief are stricter than for business asset taper relief. Certain conditions must be met with respect to the significance of the disposal and the period of time that the taxpayer has held the asset. Disposal of an asset used for business purposes without there also being a disposal of the whole or part of that business will not qualify for relief. There are 3 categories of qualifying business proposals.

A material disposal of a business asset

A disposal of trust business assets

A disposal associated with the relevant material disposal.



In contrast to the old retirement relief, the age of the individual when the disposal is made is irrelevant.

Material disposal of a business asset

There must be both a qualifying holding period and material disposal.

For there to be a qualifying holding period, the business or the company must be owned by the individual throughout the year ending with date of the disposal or, where the disposal occurs within three years of the company ceasing to be a trading company or a member of a trading group, throughout the year ending with the cessation of trading.


The following qualify as material disposals of business assets:

The disposal of the whole or part of a business including a partnership interest

The disposal is (or of interest in) one or more assets in use for the purposes of the business, at a time when the business ceased trading and the disposal occurs within three years of the business ceasing to trade.

Assets consisting of shares in or securities of a company where the company is an individuals personal company and the individual is an officer or employee of the company or one or more companies that are part of a trading group. There is no minimum working time requirement.


An individuals personal company is either a trading company or the holding company of a trading group in which the individual owns at least 5% of the company's ordinary share capital and exercises at least 5% of the company's voting rights. There will be no rounding up of percentage points. So 4.98% is not enough.

Disposal of trust business assets.

The draft legislation contains specific provisions with respect to trust businesses. These provisions are not the same as those which apply to individuals.

The entitlement to entrepreneurs' relief is dependent on there being a qualifying beneficiary and the qualifying beneficiary agreeing to allow the trustees to utilise part of his or her lifetime allowance.

For Entrepreneurs' relief to be due there must be a disposal of qualifying assets, a qualifying beneficiary and a qualifying holding period.
Qualifying assets are assets forming part of the settled property of the trust which are either:


Assets (or interest in assets) used or previously used for the purposes of the qualifying beneficiary's business; or

Assets consisting of ( or interests in ) shares or securities of a company which qualifies as the personal company of the qualifying beneficiary.


A qualifying beneficiary is a beneficiary who has an interest in possession (other than for a fixed term) in either the whole of the settled property or a part of it which consists or includes the business asset disposed of. It is unclear how strictly the "otherwise than for a fixed term" qualification will be interpreted. Arguing that a life term is by its nature a fixed term is unsupportable in this context.

The qualification would, however, seem to disqualify trusts where a beneficiary has an interest in possession up until a certain time in their life ( such as marriage or reaching a certain age) and will then be entitled to the asset absolutely ( or someone else will be entitled to the assets or succeeding life interest.) As such this appears to be a significant restriction.


Where a beneficiary who is not a qualifying beneficiary also has an interest in the business assets, the qualifying beneficiary's proportional interest (and therefore, the proportion of the gain potentially eligible for entrepreneurs' relief) is to be taken to be the same as his interest in the income from the property before it was disposed of.


Where there is a disposal of assets, the business assets must be used for the purposes of the business (including a business carried on in partnership) carried on by the qualifying year. Furthermore, the qualifying beneficiary must cease trading on the date of the disposal or have ceased trading in the three year period to the disposal date.


Where there is a disposal of shares or securities, it would appear that the holding of the trustees is irrelevant. The eligibility to claim entrepreneurs' relief is entirely dependent on the position of the qualifying beneficiary.

It would therefore appear from the draft legislation that:
The beneficiary being an officer/employee and the trust owning at least 5% of the ordinary share capital with the trustees being able to exercise at least 5% of the voting rights

Would NOT be sufficient to qualify for entrepreneurs' relief. The legislation provides for an order of priority where, on the same day, there is both a disposal of the trust business assets in respect of which an individual is a qualifying beneficiary and a qualifying business disposal by the individual. Entrepreneurs' relief must be applied to the disposal made by the individual in priority to the trust disposal.


A disposal associated with a relevant material disposal

Relief under this heading is only available if there is a relevant material disposal. The following constitute such a disposal.

The disposal of the whole or part of the individuals interest in the assets of a partnership; or

The disposal of (or interests in) shares in or securities of a qualifying company.


Where this condition is met it is then necessary to fulfil the associated condition and the qualifying holding period condition. To fulfil the associated condition the disposal must be made as part of the withdrawal by the individual from participation in the business carried on by the partnership or by the company or a company which is part of a trading group.

The qualifying holding period condition is met if the assets (or interest in the assets) disposed of are in use for the purposes of the business for a one year period which ends with the earlier of the date of the material disposal of business assets and the cessation of the business of the partnership or company.


There are provisions for a just and reasonable restriction of relief ( based on the proportion of non business usage or the comparison of rent received during the period to the open market rental value.) Where there is an associated disposal and any of the following conditions are met.


The asset disposed of was not used for business purposes throughout its ownership period

Only part of the asset disposed of was ever used for business purposes.

The individual was concerned with carrying on the business for only part of the period in which the asset disposed of was used for the purposes of the business.

For the whole or part of the period of business use the availability of the asset was dependent on the payment of rent.

Spouses and civil partners


There are no special provisions within entrepreneurs' relief for transfers between spouses or civil partners. Accordingly their holding periods are not aggregated in the way they are for the purposes of taper relief. There are also no provisions for a transfer of lifetime allowances.

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