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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Entrepreneurs’ Relief: qualifying disposals by individuals: examples

Example 1

S sells her trading business, which she has owned for the last 8 years, in February 2009 and realises gains and losses as follows:-

Gain of £250,000 on her factory premises
   
Gain of £300,000 on goodwill
Loss of £100,000 on her retail shop

Each of these gains and losses arising from the disposal of the business will constitute a ‘material disposal of business assets’ by S as an individual. Together they give net gains (see CG 64125) of £450,000, which will qualify for Entrepreneurs’ Relief.

Example 2

In 1995 E purchased a buy-to-let property for £100,000 that is let out on an assured short-hold tenancy basis. He sells this property in October 2008 for £250,000. The gain is £150,000.

This gain is not eligible for Entrepreneurs’ Relief as it does not constitute a material disposal of business assets. For Entrepreneurs’ Relief purposes a ‘business’ has to be a ‘trade, profession or vocation’. The straightforward letting of property is not a trade.

Example 3

R has been an equal member of a 4 person trading partnership for several years. He retires completely from the partnership and disposes of his interest in partnership assets to the other partners, realising gains of £125,000. All of these gains will qualify for Entrepreneurs’ Relief as they will constitute a material disposal of the whole of R’s interest in the partnership.

Alternatively R may decide to work part time and agrees to reduce his partnership share to 10% from the original 25%. He sells the balance of his interests in the partnership assets to the other partners and realises chargeable gains of £75,000. R may claim Entrepreneurs’ Relief because the 15% share of the partnership interests he disposed of will constitute a material disposal of part of his interest in the business of the partnership.

Example 4

F has carried on a retail business for 5 years. In July 2010 he takes on W as a partner. W pays £300,000 to F to enter into the partnership agreement which shares the interest in all of the business assets equally between them. The £300,000 received by F is a capital receipt in his hands which may give rise to a gain, as he disposes of a 50% interest in each of the business assets. Those gains may qualify for Entrepreneurs’ Relief because F’s disposal is a material disposal of part of his business to W, his new business partner.

Example 5

T sells his shares in his company in September 2010 and realises a gain of £360,000. The company was a trading company but ceased to trade in August 2009. Since February 1995 he had owned 50% of the ordinary shares of the company, which entitled him to 50% of the voting rights. Since 1997 he has been a director of the company. T’s gain will qualify for Entrepreneurs’ Relief because even though T’s company had not traded throughout the 12 months prior to the disposal of the shares it had been a trading company within the period of three years prior to the disposal and he had held the requisite shares and voting rights, and been an officer of the company throughout the 12 months prior to the trade ceasing.

Example 6

N sells her business in 2009 and realises a gain of £99,000. This qualifies for Entrepreneurs’ Relief because it will constitute a ‘material disposal of business assets’. N claims the relief, but also makes an investment of £80,000 in qualifying Enterprise Investment Shares (EIS) and claims to defer the gain.

N’s gain of £99,000 is reduced by 4/9ths, resulting in a chargeable gain of £55,000 - see CG64125. The investment in EIS shares exceeds £55,000, so the whole of the chargeable gain of £55,000 is deferred. This amount will come into charge at some later time under the normal EIS rules for charging deferred gains - see CG62800.