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HMRC internal manual

Capital Gains Manual

Entrepreneurs’ Relief: qualifying “associated disposals” by individuals: disposals on or after 18 March 2015

For disposals on or after 18 March 2015 the new version of TCGA92/S169K applies.  This requires a minimum level of disposal of a partnership interest or shares or securities as a condition for a disposal of an asset used by a partnership or company to qualify as an associated disposal.  In addition, there must be no arrangements for the individual or a person connected with them to reacquire an interest in the partnership or company.

There will be “a disposal associated with a relevant material disposal” (or associated disposal) which qualifies for Entrepreneurs’ Relief when the following conditions are met (TCGA92/S169K(1)).

One out of condition A1, A1A, A2 or A3. TCGA92/S169K(1)

Broadly, an individual must dispose of:

  • at least a 5% interest in the assets of a partnership, condition A1, or
  • if the partnership interest is less than 5%, all of that interest, condition A1A, or
  • shares in, or securities of a company (or interests in such shares or securities), conditions A2 and A3.

A fuller description of these conditions is given below.

The key change to the rules in March 2015 was the requirement that where there is a disposal of partnership interest, shares or securities this represents at least a 5% interest in the whole partnership assets or the company’s ordinary share capital, or issued securities.  To emphasise, this does not mean 5% of the individual’s own holding but 5% of the total.

If the partnership disposal is of less than a 5% interest but represents the whole of that individual’s interest, condition A1A will be met if the individual had held an interest of at least 5% throughout a period of 3 years during the 8 years ending with the date of disposal.

In the case of a disposal of shares, those disposed of must carry at least 5% of the voting rights. Although a disposal of shares without voting rights can be a material disposal of business assets if the personal company test is met by the individual due to a further holding of the required amount of shares with voting rights, only a disposal of shares with voting rights can be a relevant material disposal for the purposes of meeting Condition A2.

In addition, there must be no arrangements by which the individual, or a person connected with him or her, may reacquire an interest in the partnership or shares or securities in the company.  In the case of a company, this extends to the shares and securities of any company that is part of the same group as the company at the time of the disposal.  Companies are treated as being members of the same group if, at the time of the disposal of shares or securities, arrangements exist that may reasonably be assumed will result in them becoming members of the same group. The material disposal is not treated as such an arrangement.

The disposal of partnership interest, shares or securities must qualify as a material disposal of business assets.  However, it is not necessary for a gain to arise on this disposal or, if there is a gain, for a claim to Entrepreneurs’ Relief to be made in respect of the disposal.

Condition B. TCGA92/S169K(3)

A disposal is made which is associated with the material disposal, and is made as part of the process of withdrawal of the individual from participation in the business of the partnership or the trading company (or a company that is a member of the trading group of which the company is a member).  See CG63998 for a discussion of what “withdrawal” means in this context.

Condition C. TCGA92/S169K(4).

The asset which is the subject of the associated disposal (the disposal mentioned in condition B) had been used for the purposes of the partnership business or company business throughout a period of 1 year ending with either

  • the date of the material disposal of business assets, or, if earlier,
  • the cessation of the partnership or company business.

If the individual disposes of an interest in an asset, Condition C refers to the use of the asset in which the interest is held, not the use of the interest.

If the associated disposal predates the material disposal or the cessation, the asset can still meet the condition if it continues to be used for the purpose of the business of the partnership or company until the date of the material disposal or cessation – it does not matter that the asset will not be owned by the individual during that period.

Condition D. TCGA92/S169K(4A)

Where the asset which is the subject of the associated disposal was acquired on or after the 13 June 2016, then it must have been owned by the individual throughout the 3 years ending with the date of the disposal.

Where an asset has been owned jointly it is possible that an individual’s interest in that asset will have changed during the three year period so that only a proportion of the gain will meet the condition: where the interest has increased, only a proportion of the gain will be eligible for ER because the total gain accrues in respect of an asset (the increased interest) which does not in its entirety meet the “three year ownership” condition.

Example -

  • Land was originally acquired jointly by Chris, David and Tina who are shareholders in TH Ltd.  The land is used in that company’s trade.
  • Chris sold his interest to David and Tina in January 2016.
  • In July 2017 Tina retires selling her shares and her interest in the land to Jerry.
  • Tina has made an associated disposal of her half interest in the land but had not held that throughout the three year period.  However, she had held at least a one-third interest.

In these circumstances a disposal may meet condition D but only a proportion of the gain will be eligible for relief. That proportion is the same as the minimum interest held throughout the period bears to the interest held at the point of disposal.

In the example that will be two thirds of Tina’s total gain (1/3 divided by 1/2 = 2/3).

 

In certain circumstances the amount of the gain on an “associated disposal” that qualifies for Entrepreneurs’ Relief may be restricted.  See CG64145.