Members of Parliament debate Finance Bill clauses on entrepreneurs' relief

Monday 26 May 2008

Entrepreneurs' relief (ER) was introduced as part of the changes to the capital gains tax (CGT) regime that came into effect from 6 April 2008. What is ER and what aspects of the draft legislation are now being debated?

What is ER?

ER is a form of CGT relief that can reduce the capital gain on disposals of certain business assets, giving a 10% effective rate of tax on the first £1 million of lifetime gains. The relief was introduced alongside other changes to the CGT regime (such as the introduction of the 18% flat rate and the abolition of taper relief) that became effective from 6 April 2008.

ER applies to 'qualifying business disposals' which are broadly:

• A disposal of the whole of part of a business
• A disposal of assets used in the business where the business ceases to be carried on
• A disposal of shares in a company (where the company is a trading company and the individual owns at least 5% of the ordinary share capital and voting rights, and the individual is an officer or employee of the company)

Relief is also available for certain 'associated disposals' when assets used in the business are disposed of as part of the individual's withdrawal from a partnership/company in which they are also disposing of their interest/shares. Where the 'associated asset' has not been used  entirely for business purposes throughout the period of ownership or where the individual has received rent from the partnership/company for use of the asset, then the amount of ER is restricted.

What aspects of ER have been debated?

The draft legislation for ER is contained in the 2008 Finance Bill. and the provisions relating to associated disposals were recently debated in the Committee stage of the Bill.

During the debate, ministers queried exactly what the definition of 'withdrawal from the business' meant (in the context of associated disposals) and amendments were proposed regarding the restrictions on ER where rent has been received by the individual.

The restrictions for rent are similar to those that existed for 'retirement relief' (that was abolished some years ago when taper relief was introduced), however there was no such condition affecting the entitlement to taper relief. A situation can therefore be envisaged where, upon the rules changing from retirement relief to taper relief, an individual started to receive rent, assuming that this would no longer affect their entitlement to relief going forward. However, any period where rent was received will now be considered when calculating any restrictions to entitlement to ER and as a result individuals may have unknowingly tainted their entitlement to ER by receiving rent at a time when the relief did not even exist. It is this element of 'retrospection' that is the subject of debate and while the amendments proposed were not accepted at this stage, Jane Kennedy, Financial Secretary to the Treasury, has agreed to consider the case for disregarding rent received before 6 April 2008 when assessing entitlement to ER.

In response to the queries on the definition of 'withdrawal from the business', Jane Kennedy confirmed that she would make every effort to ensure draft guidance is available before the Report stage of the Bill.

Francesca Lagerberg, Head of Grant Thornton's National Tax Office says: "It is good to see that the Government appears to be listening to the concerns of professional bodies on the retrospective nature of part of the entrepreneurs' relief legislation. However, it still remains to be seen what, if any, amendments will be made at Report stage."

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