Chapter 13 Chargeable Gains Relief(1) - ACCAspace.comaccaspace.com/upload/ACCA_P6/PPT/P6_Chapter_24... · 2017-07-17 · On 1 March 2016, Edna, Frank and George sold the partnership

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ACCA P6 Advanced Taxation(uk) (AT uk)

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ACCA Lecturer: Shelley Song

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Chapter 13 Chargeable Gains: Reliefs

1 Entrepreneurs' Relief

3 The Replacement of Business Assets (Rollover Relief)

2 Gift Relief (Holdover Relief)

4 The Transfer of a Business to a Company (Incorporation Relief)

5 EIS Deferral Relief and SEIS Reinvestment Relief

6 Altering Dispositions Made on Death


Introduction to Entrepreneurs’ Relief

You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business. !Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets. !


1 Entrepreneurs' Relief

1.2 The Operation of the Relief

1.1 Conditions for Entrepreneurs’ Relief

1.3 Lifetime Limit

1.4 Goodwill: Restriction

1.5 Claim


1.1 Conditions for Entrepreneurs’ Relief

1.1.1 Disposal of the Whole or Part of a Business

1.1.2 Disposal of Assets Used in a Business Which Has Ceased

1.1.3 Disposal of Shares or Securities

1.1.4 Selling Assets You Lent to the Buisiness


1.1.1 Disposal of the Whole or Part of a Business ——First Category

➢ The business must have been owned by the individual (you’re a sole trader or business partner) throughout the period of one year ending with the date of the disposal. It is important to note that there has to be a disposal of the whole or part of the business as a going concern, not just a disposal of individual assets in a continuing business.

➢ The business must be a trade, profession or vocation conducted on a commercial basis with a view to the realisation of profits.

➢ Relief is only available on relevant business assets. These are assets used for the purposes of the business and cannot include shares and securities nor assets held as investments.

➢ In certain circumstances, goodwill is not a relevant business asset, ie. denying Entrepreneurs’ Relief for disposals of goodwill to related companies.


1.1.2 Disposal of Assets Used in a Business Which Has Ceased——Second Category

The second category is a disposal of one or more assets in use for the purposes of a business at the time when the business ceases to be carried on. The following conditions must be satisfied: !➢ (a) The business has been owned by the individual throughout

the period of one year ending with the date on which the business ceases to be carried on; and

➢ (b) The date of cessation is within three years before the date of the disposal. !

➢ As for the first category, relief is only available on relevant business assets, not shares and securities nor assets held as investments.


1.1.3 Disposal of Shares or Securities ——Third Category

The following conditions must be usually be satisfied: (a) The company is the individual’s personal company ——minimum percentage shareholding ➢ (a) The individual holds at least 5% of the ordinary share

capital; and ➢ (b) The individual can exercise at least 5% of the voting

rights in the company by virtue of that holding of shares. and (b) The company is either a trading company or holding company of a trading group (rather than non-trading activities like investment); and (c) The individual is an officer or employee of the company (or a group company).


Disposal of Shares or Securities (Cont.) ——Minimum Ownership Period

These conditions must also be satisfied either: ➢ (a) Throughout the period of one year ending with the

date of the disposal; or !

➢ (b) Throughout the period of one year ending with the date on which the company (or group) ceases to be a trading company (or trading group) and that date is within the period of three years ending with the date of the disposal.


The Conditions of EMI are Slightly Different

If the shares are qualifying EMI (Enterprise Management Incentive) shares, the conditions are slightly different. !The shares must have been acquired under an option that had been granted at least one year prior to the date of disposal of the shares and the individual must have been an officer or an employee of the trading company (or one of the companies in the trading group) throughout that one year period. There is no minimum ownership period for the shares themselves nor a minimum percentage shareholding.


1.1.4 Associated Disposals (Selling Assets You Lent to the Business)

Entrepreneurs’ relief is also available on associated disposals. !An associated disposal asset is an asset which is owned by an individual and used for at least one year for business purposes by a partnership of which he is a partner or by his personal trading company. !An associated disposal is one which is associated with a material disposal of all or part of the individual’s partnership interest or a disposal of shares in the company, as relevant. The disposal must be made as part of the withdrawal from participation in the business of the partnership or the company by the individual. There should also normally not be a significant time interval between the material disposal and the associated disposal.


If you’re selling assets you lent to the business. Both the following must apply: !➢ You’ve sold at least 5% of your part of a business

partnership or your shares in a personal company. !

➢ you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares - or the date the business closed

Substantive Requirements of Associated Disposals


If the individual charged rent to the partnership or company, entrepreneurs’ relief will be restricted. If a full market rent was charged, there will be no entrepreneurs’ relief. If less than a full market rent was charged, a just and reasonable proportion of gain will be eligible for entrepreneurs’ relief. !For example if the rental charged was 75% of the full market rent (100 – 75) = 25% of the gain will be eligible for entrepreneurs’ relief.

Associated Disposals (Cont.)


1.2 The Operation of the Relief

➢ Where there is a material disposal of business assets which results in both gains and losses, losses are netted off against gains to give a single chargeable gain on the disposal of the business assets.The rate of tax on this chargeable gain is 10%. !

➢ An individual may use losses on assets not qualifying for entrepreneurs’ relief and the annual exempt amount in the most beneficial way, firstly being set against gains which do not qualify for entrepreneurs’ relief in order to save tax at either 18% or 28% rather than at 10%. !

➢ The chargeable gain qualifying for entrepreneurs’ relief is treated as the lowest part of the amount on which an individual is chargeable to capital gains tax. Although this does not affect the tax on the gain qualifying for entrepreneurs’ relief (which is always at 10%), it may have an effect on the rate of tax on other taxable gains.


Example: The Operation of the Relief

Simon sells his business, all the assets of which qualify for entrepreneurs’ relief, in September 2015. The chargeable gain arising is £12,000. Simon also made a chargeable gain of £24,000 in December 2015 on an asset which did not qualify for entrepreneurs’ relief. Simon has taxable income of £18,000 in 2015/16. The CGT payable for 2015/16 is calculated as follows: Gains CGT £ £ Gains qualifying for entrepreneurs’ relief Taxable gain 12,000 CGT @ 10% 1,200 Gains not qualifying for entrepreneurs’ relief Gain 24,000 Less: annual exempt amount (best use) (11,100) Taxable gain 12,900 CGT on £(31,785 – 18,000 – £12,000) = 1,785 @ 18% 321 CGT on £(12,900 – 1,785) = 11,115 @ 28% 3,112 CGT 2015/16 4,633


1.3 Lifetime Limit——£10 Million

Maureen sells a shareholding in January 2016, realising a gain of £9,300,000. The conditions for entrepreneurs’ relief are satisfied for this disposal and Maureen makes a claim for the relief to apply. Maureen had already made a claim for entrepreneurs’ relief in respect of gains totalling £900,000. Maureen also makes an allowable loss of £(20,000) in 2015/16 on an asset not qualifying for entrepreneurs’ relief. Her taxable income for 2015/16 is £200,000.Calculate the CGT payable by Maureen for 2015/16. Gains CGT £ £ Gain qualifying for entrepreneurs’ relief £(10,000,000 – 900,000) 9,100,000 CGT @ 10% on £9,100,000 910,000 Gains not qualifying for entrepreneurs’ relief £(9,300,000 – 9,100,000) 200,000 Less allowable loss (best use) (20,000) Net gain 180,000 Less: annual exempt amount (best use) (11,100) Taxable gain 168,900 CGT @ 28% on £168,900 47,292 Total CGT due 957,292


1.4 Goodwill: Restriction

➢ For disposals on or after 3 December 2014, goodwill is not a relevant business asset for entrepreneurs’ relief if it is transferred directly or indirectly by a person to a close company, where the person is a related party to the close company. !

➢ A close company is a company controlled by its shareholder-directors or by five or fewer shareholders. The person is a related party to the close company if he is, or is an associate of, a participator in the close company. !

➢ If a partnership incorporates, any partner who leaves the business at that time is still a related party to the new company, as he is an associate of the other partners. However, a specific exclusion exists so that this restriction on entrepreneurs'relief does not apply to a person who is a retiring partner. A retiring partner is one who is not, and no arrangements exist under which he could become, a participator in the close company.


Example: Goodwill (Restriction)

➢ Edna, Frank and George have been trading in partnership for many years sharing profits equally. The chargeable assets of the partnership consist of a freehold building which was acquired for £60,000 and goodwill which has been built up since the partnership started business. !

➢ Edna has decided to retire from the partnership and Frank and George now wish to carry on the business through the medium of a company. Frank and George have therefore set up a new company, FG Ltd, in which they subscribed £100,000 each for 10,000 ordinary shares. !

➢ On 1 March 2016, Edna, Frank and George sold the partnership business to FG Ltd. The value of the building at that date was £105,000 and the goodwill was valued at £72,000. Edna was paid cash for her share of the partnership business and Frank and George’s entitlements are held on loan accounts in FG Ltd. !

➢ Show the CGT positions of Edna, Frank and George on the sale of the partnership business to FG Ltd. Assume they have no other chargeable assets and are higher rate taxpayers.


Example: Goodwill (Restriction)(Cont.)

Edna Gains CGT £ £ Gains qualifying for entrepreneurs’ relief Gain on building £(105,000 – 60,000) ×1/3 15,000 Gain on goodwill £(72,000 – 0)×1/3 24,000 Less annual exempt amount (11,100) Taxable gain 27,900 CGT £27,900 @ 10% 2,790 !Frank and George Gains qualifying for entrepreneurs’ relief Gain on building £(105,000 – 60,000) ×1/3 15,000 CGT @ 10% 1,500 Gains not qualifying for entrepreneurs' relief Gain on goodwill £(72,000 – 0) ×1/3 24,000 Less annual exempt amount (best use) (11,100) Taxable gain 12,900 CGT on £12,900 @ 28% 3,612


1.5 Claim

An individual must claim entrepreneurs’ relief: it is not automatic. !The claim deadline is the first anniversary of 31 January following the end of the tax year of disposal. !For a 2015/16 disposal, the taxpayer must claim by 31 January 2018.

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Chapter 13 Chargeable Gains Relief(1) - ACCAspace.comaccaspace.com/upload/ACCA_P6/PPT/P6_Chapter_24... · 2017-07-17 · On 1 March 2016, Edna, Frank and George sold the partnership