Capital Gains Tax: changes to rules to extend availability of Entrepreneurs' Relief on associated disposals
Published 16 March 2016
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This publication is available at https://www.gov.uk/government/publications/capital-gains-tax-changes-to-rules-to-extend-availability-of-entrepreneurs-relief-on-associated-disposals/capital-gains-tax-changes-to-rules-to-extend-availability-of-entrepreneurs-relief-on-associated-disposals
Who is likely to be affected
Individuals who realise gains on a disposal of a private asset, which is used in a business carried on by their partnership or company, when they retire or reduce their participation in their business.
General description of the measure
The measure allows Entrepreneurs’ Relief (ER) to be claimed on an ‘associated disposal’ of a privately-held asset when the accompanying disposal of business assets is to a family member. Relief can also be claimed in some cases where the disposal of business assets does not meet the present 5% minimum size condition.
Policy objective
The measure incentivises and rewards proprietors of businesses who are retiring or reducing their participation in their business and passing it to other family members. It promotes the stability and continuity of a business when ownership changes hands. This is part of the government’s policy of supporting enterprise and entrepreneurship.
Background to the measure
Finance Act 2015 introduced new rules to combat abuse of ER. Whilst preventing the abuse, those rules also resulted in relief not being due on ‘associated disposals’ when a business was sold to members of the claimant’s family under normal succession arrangements.
It was announced at Autumn Statement 2015 that changes to mitigate the impact of the Finance Act 2015 rules on associated disposals in these circumstances were being considered.
Detailed proposal
Operative date
The changes announced by this measure will be backdated to the date on which the Finance Act 2015 measures became effective. They will therefore apply to associated disposals on or after 18 March 2015.
Current law
Current law is included in chapter 3 of part 5 of the Taxation of the Chargeable Gains Act 1992 (TCGA). Section 169K contains the conditions for a disposal to be an associated disposal.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to change the definitions of ‘partnership purchase arrangements’ and ‘share purchase arrangements’ for ER purposes by excluding (i) the material disposal itself and (ii) arrangements which pre-date both the material disposal and the associated disposal, and are independent of them.
The requirement that the material disposal of business assets is of 5% or more of the claimant’s share in a partnership or holding in a company does not apply where the claimant disposes of the whole of his interest and has previously held a larger stake.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| -45 | -20 | -40 | -40 | -40 |
These figures are set out in Table 2.1 of Budget 2016 as ‘Capital Gains Tax: extend reliefs’, and have been certified by the Office for Budget Responsibility. They represent the combined Exchequer impact of a number of changes at Budget 2016 to extend the availability of existing reliefs, including Entrepreneurs’ Relief.
More details can be found in the policy costings document published alongside Budget 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
Individuals who are either partners in a firm or shareholders in a company will benefit if they dispose of assets which they own and which are used in the business, and also reduce their participation in their firm’s or company’s business in favour of family members. The measure is expected to have an indirect positive impact on family stability by supporting business succession arrangements.
Equalities impacts
ER claimants tend to be male and of above average means. Individuals selling their businesses on retirement make up a significant group of claimants. People retiring and severing links with their business are likely to be most affected by this measure. It is not anticipated that there will be adverse impacts on any other group with protected characteristics.
Impact on business including civil society organisations
This measure affects disposals made by individuals of assets held in their personal capacity. There is therefore no direct impact on businesses, but it is expected to benefit businesses indirectly by making it easier to pass on businesses as going concerns within a family.
This measure is particularly relevant to farming businesses and their succession planning.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be no significant operational impact on HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Rob Clay on Telephone: 03000 570649 or email: rob.clay@hmrc.gsi.gov.uk