A recent report by the National Audit Office revealed that entrepreneurs’ capital gains tax relief had cost the government £2 billion more than expected last year.
Entrepreneurs’ relief is available for capital gains realised by individuals, and by the trustees of certain settlements, on the disposal of qualifying business assets. It was introduced in April 2008 following the abolition of taper relief.
Gains which fall within the lifetime limit (currently £10 million) are taxed at a 10% rate of capital gains tax compared with the standard rate of 18% and the rate of 28% payable by individuals who are liable to income tax at the higher or additional rate. This reduced rate means that significant tax savings are available where the conditions for entrepreneurs’ relief are met.
Entrepreneurs’ relief is available on:
- the disposal of the whole or part of a business;
- the disposal of an asset which was used for the purposes of a business at the time the business ceased to be carried on; and
- the disposal of shares or securities in a company which is, or was, a trading company or the holding company of a trading group.
A number of conditions, such as a minimum ownership period and a timeframe in which a disposal must take place, must also be met before entrepreneurs’ relief may be claimed. Please click here to see our entrepreneurs’ relief factsheet for more information.
Entrepreneurs’ relief was expected to cost the Treasury £900 million last year but instead cost £2.9 billion. Given the unexpected cost of entrepreneurs’ relief, the National Audit Office has raised the question of whether the relief is being misused by taxpayers and that this misuse is not being detected by HMRC. The report also criticised HMRC for having inadequate frameworks to monitor the use of this and well as other tax reliefs.
These criticisms, together with pressure from the public to crack down on tax avoidance generally, may lead to HMRC scrutinising claims for entrepreneurs’ relief more closely in future. Individuals looking to claim the relief should ensure that all the relevant conditions are met and that sufficient records are kept to support any claim made.
It is important to note that the conditions of the relief require the assets or shares to have been held for a minimum period. This should be kept in mind when planning any disposals as it may be beneficial to delay disposals to benefit from the relief. In addition, when considering entrepreneurs’ relief on the sale of shares in a company, the individual must have been an officer or employee of the company for a minimum period.
A further consideration is that the company whose shares are being sold must be a trading company, rather than an investment company, for entrepreneurs’ relief to apply. The activities and asset base of the company should be reviewed to ensure that the company’s activities do not include to a substantial extent activities other than trading activities. In particular, large cash balances held by the company can often be challenged by HMRC as being held for a non trading purposes and care is needed regarding directors minutes evidencing intentions for the use of funds in these circumstances.
If you would like any further information regarding entrepreneurs’ relief, including reviewing whether your company qualifies as a trading company, please contact your local tax advisor.
Private Client Tax team
Private client tax