Entrepreneurs’ Relief

The conditions for Entrepreneurs' Relief have been likened to Retirement Relief which was phased out between 1998 and 2003. The good news is that the qualifying rules for the relief appear to be simpler. In order to qualify for Entrepreneurs' Relief there is no minimum age limit and in general it is available where the relevant conditions have been met for a period of just one year. Retirement Relief, on the other hand, had a minimum age limit and a qualifying period of up to 10 years.

However, although Entrepreneurs' Relief is generally more flexible than its predecessor, Retirement Relief, it is, unfortunately, less generous. The maximum tax benefit of the new relief is £80,000. A successful entrepreneur (where the lifetime allowance of £1 million will be insufficient) will end up paying more under the new regime in the long run, as any gains in excess of £1 million will be taxed at 18%. However, who knows when the rules will change again!

The draft legislation extends the relief to the gain of an associated disposal of an asset used by the company. For example, the relief may apply where the company's trading premises are held privately by a shareholder/director, as long as the disposal takes place at the same time as the disposal of the shares in the company itself, and a number of other conditions are met. These would not affect the situation if the company owned the property, but please bear in mind the trading risks if the company owns the property.

A blow for some individuals is that further conditions, unexpected by most, have been introduced which may restrict/disqualify such an asset from the benefit of the relief. One such condition is that in the above example the relief will not be available where the individual that owns the premises charges the company/partnership an open market rent for occupying them. The relief will be restricted proportionately where a reduced rent is charged. These conditions will apply to rent charged both before 6 April 2008, as well as after. The explanation from H M Revenue & Customs is that the payment of rent turns the asset into an investment, and that investments should not have the benefit of Entrepreneurs' Relief.

Prior to the reforms, the renting of privately owned premises to the company/partnership was a tax-efficient way of running a business. The business's corporation tax bill would be reduced in line with the rent, and the owner of the premises would also receive tax relief on the interest paid on any mortgage. In light of these changes it is important to review your company structure. If your company would realise gains of more than £1 million, then this is a matter to be considered but is unlikely to be material (as Entrepreneurs' Relief will be used by the gain on the sale of the company). However, if your business would not realise gains of £1 million on its disposal then this is an issue which should be addressed.

The relief will also be restricted where the property has not been used for business purposes throughout the entire period of ownership by the individual; where the individual has not been involved in the business throughout the period of ownership or where the property has been used partially for business purposes.

The Finance Bill has yet to be considered by Parliament, and further changes to this new relief could still take place. It is only when the Finance Bill receives Royal Assent (before the end of July), that we will be able to discuss this subject with any sense of certainty.