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HMRC internal manual

Capital Gains Manual

Entrepreneurs’ Relief: qualifying “associated disposals” by individuals: meaning of “withdrawal from business”.

Withdrawal from business TCGA92/S169K(3)

There must be a link between the “material disposal of business assets” and the “associated disposal” for Entrepreneurs’ Relief to be due in respect of the associated disposal.  The condition is satisfied when both disposals together constitute part of the process of “withdrawal from participation in the business”.

Relief will not be due unless the disposal of the asset owned by the individual (rather than the partnership or company) is related to the individual’s reduction of their interest in the assets of the partnership, or holding in the company, as the case may be.

It is not necessary for the individual to reduce the amount of work which they may do for the business.  For example -

  • G owns a shop from which he trades in partnership with his son.  The asset sharing ratio is - G 3/5ths: son 2/5ths. He wishes to reduce his involvement and the ratio is then altered to - G 1/5th: son 4/5ths; G also gifts the premises to his son but continues to work full-time in the shop.
  • R owns a small factory unit which is used by her “personal company”, S Ltd of which she is the full-time managing director.  She sells both her shares and the unit to another company in a takeover, but remains managing director.

 

In these examples the material disposal (G’s reduction of his interest in the assets of the partnership, and R’s disposal of her shares) together with the associated disposals (G’s gift of the premises to his son and R’s sale of the unit) would represent a withdrawal from participation in the business.

As the “material disposal” and the “associated disposal” must be part and parcel of one single withdrawal from participation in the business, there should normally be no significant interval between the two disposals.

The legislation does not specify a time limit within which the associated disposal must be made.  The guidance in these paragraphs is intended to allow a reasonable application of TCGA92/S169K in line with the time limit used elsewhere for the purposes of Entrepreneurs’ Relief.

It is a question of fact in each case whether there has been a withdrawal from the business.  The issue is not linked to the amount of work done or time spent working in the business, but the material disposal and associated disposal must together constitute a withdrawal from the business, even if there is an interval between the disposals.

However, where a partnership or company ceases to trade, it is quite possible that there may be an interval between the “material disposal” and the disposal of the asset that is the subject of the “associated disposal”.  In such cases you may accept that a disposal of an asset is associated with a “material disposal” if the asset is disposed of -

  • within one year of the cessation of a business;
  • within three years of the cessation of a business and the asset has not been leased or used for any other purpose at any time after the business ceased;
  • where the business has not ceased, within three years of the material disposal, provided the asset has not been used for any purpose other than that of the business.

 

For example -

W, M and S are in partnership running a chain of retail chemists.  W owns one of the shops used by the business.  He decides to leave the partnership and move abroad.  M and S continue in partnership. W intends at the time of leaving the partnership to sell the shop, which continues to be used by the partnership, to M.  However, M needs time to arrange his finances to allow the sale to proceed. W disposes of the shop to M 18 months after leaving the partnership.  So the sale of the shop qualifies as an “associated disposal” under the third bullet point above, as the business does not cease, the shop continued to be used in the business and the disposal of the shop takes place within three years of W leaving the partnership.

Cases which do not fall within the above guidelines will have to be considered carefully on their particular facts to see whether they meet the requirement of TCGA92/S169K(3).  For example, if the asset has been used for any other purpose for a significant period following the material disposal, it is unlikely that the conditions for relief will be met.

Where certain “associated disposals” are made, the amount of the gain qualifying for Entrepreneurs’ Relief may be subject to restrictions where any of a number of conditions apply - see CG64145.