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Capital Gains Manual

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Entrepreneurs’ Relief: calculation of the relief - general

TCGA92/S169N

Where a claim for Entrepreneurs’ Relief has been made, the aggregate figure of “relevant losses” in respect of the qualifying business disposal is deducted from the aggregate figure of “relevant gains” in respect of that disposal - TCGA92S169N(1).

The aggregate “relevant losses” and aggregate “relevant gains” in respect of the qualifying business disposal are explained below.

If the aggregate losses exceed the aggregate gains, Entrepreneurs’ Relief cannot be claimed (TCGA92/S169M (4) - see CG63970).

If however, upon a claim being made for Entrepreneurs’ Relief, the aggregate gains exceed the aggregate losses the resulting net gain is -

  • for disposals made from 6 April 2008 to 22 June 2010, reduced by 4/9ths. The reduced amount is then the “chargeable gain” which is charged at the single (18%) rate of CGT - TCGA92/S169N (2) & (4).
  • for disposals made on or after 23 June 2010, the net gain is the “chargeable gain” and is charged to CGT at a rate of 10% - TCGA92/S169N (2) & (3) as amended by F(No.2)A 2010.

Other allowable losses can be deducted from this TCGA92/S169N “chargeable gain”, and the Annual Exempt Amount can be set against it.

Over-riding Limit

The maximum amount of gains which may benefit from Entrepreneurs’ Relief is subject to a lifetime limit for all qualifying disposals. This lifetime limit has been revised as follows:

For qualifying disposals made:

  from 6 April 2008 to 5 April 2010 £1,000,000
     
  from 6 April 2010 to 22 June 2010 £2,000,000
  on or after 23 June 2010 £5,000,000
  on or after 1 April 2011 £10,000,000

This is the limit of net gains (the aggregate of “relevant gains” less the aggregate of “relevant losses” in respect of qualifying business disposals) to which either the 4/9ths reduction is applied or which is chargeable at the 10% rate.

That amount of net gains cannot exceed the limit available at the time. Net gains are the aggregate “relevant gains” less the aggregate “relevant losses” in respect of a qualifying business disposal. It is this figure to which the 4/9th reduction is applied or which is charged at the 10% rate - TCGA92/S169N(4), (4A) & (4B).

A person may be entitled to Entrepreneurs’ Relief on more than one occasion. For example an individual may dispose of a second business, or their shares in several instalments, or they may sell part of their business at one time and then sell the rest of it later. Each disposal may meet the qualifying conditions for relief but as only a lifetime limit of gains is available for relief it is necessary to take into account earlier qualifying gains which have been the subject of a reduction.

Example

M made a qualifying business disposal on 30 August 2008 realising a gain of £1.2 million. If a claim to Entrepreneurs’ Relief is made then £1 million of those gains would be reduced by 4/9th. The balance of £0.2 million would fall outside of the lifetime limit applying at the time of that disposal.

M then made a second qualifying business disposal on 31 May 2010 realising a gain of £1.5 million. £1 million of that gain would qualify for relief (that amount being reduced by 4/9th). The balance of £0.5 million would fall outside the lifetime limit applying at that time of £2 million, taking into account the earlier claim.

On 1 February 2011 M made a third qualifying business disposal realising a gain of £4.5 million. Only £3 million would qualify for relief (that £3 million now being charged to CGT at 10%). The balance of £1.5 million would fall outside the lifetime limit applying at that time of £5 million, taking into account the two earlier claims.

Chargeable Gain

For disposals from 6 April 2008 to 22 June 2010 the net figure after Entrepreneurs’ Relief (that is, the aggregate “relevant gains” and aggregate “relevant losses” in respect of the qualifying business disposal in question, less the 4/9ths reduction) is treated as a chargeable gain arising to the claimant at the time of the qualifying business disposal, and the various gains and losses aggregated are then not brought into account separately for CGT purposes - TCGA92/S169N(4) & (9).

As a result of the amendments made to section 169N by F(No.2)A 2010/Sch1/para5 the chargeable gain in respect of qualifying business disposals made on or after 23 June 2010 will be the net figure of the aggregate “relevant gains” and aggregate “relevant losses”. The various gains and losses aggregated are then not brought into account separately for CGT purposes - TCGA92/S169N (2) & (9).

“Relevant gains”

These are gains on the disposals that comprise the qualifying business disposal, but do not include gains on disposals of assets that are not “relevant business assets” (see below). The “relevant gains” are computed in accordance with the normal rules for chargeable gains and determined by TCGA - TCGA92/S169N(5).

“Relevant losses”

These are similar to “relevant gains”, being losses on the disposals that comprise the qualifying business disposal, but do not include losses on disposals of assets that are not “relevant business assets” (see below). Again these losses are computed in accordance with the normal rules for allowable losses - TCGA92/S169N(6). In making a claim for Entrepreneurs’ Relief, which may include “relevant losses” on qualifying business disposals it is assumed that the necessary notice under TCGA92/S16(2A) has been given to make those losses ‘allowable losses’.

The aggregate “relevant gains” and aggregate “relevant losses” are simply the sums of the various gains and losses in respect of a qualifying business disposal.

Relevant business assets

‘Relevant business asset’ is defined at TCGA92/S169L as an asset, or an interest in an asset, used for the purposes of a business but excludes shares and securities and assets which are held as investments - see CG64005.

“Earlier relevant qualifying business disposals”

“Earlier relevant qualifying business disposals” as referred to above - TCGA92/S169N(4) are:

  • where the qualifying business disposal to which the current claim relates is made by an individual, earlier qualifying disposals made by that individual (see CG63975) or earlier disposals of trust business assets where that individual was the qualifying beneficiary (see CG63985).
  • where the qualifying business disposal to which the current claim relates is a disposal of trust business assets, earlier qualifying business disposals made by the relevant qualifying beneficiary (see CG63985) and earlier disposals of trust business assets by trustees which qualified for relief by reference to that individual being the qualifying beneficiary (whether they are the trustees of the same settlement or a different one).

You should note that the combined effect of these rules is that where there is a disposal of trust business assets, the gains in respect of which Entrepreneurs’ Relief is claimed forms part of the relevant qualifying beneficiary’s lifetime limit of gains that can qualify for the relief - TCGA92/S169N(4) & (7).

Same day disposals

Where on the same day a disposal is made of:

  • trust business assets, and
  • by the individual who is the qualifying beneficiary, a disposal of qualifying disposal of business assets

then in applying the lifetime limit to the gains on these transactions, the disposal by the individual who is the qualifying beneficiary is treated as having taken place before the disposal of trust business assets - TCGA92/S169N(8).

The effect of this is that if the qualifying beneficiary’s lifetime limit (after taking account of any earlier relevant qualifying business disposals) is not sufficient for Entrepreneurs’ Relief to be available on the whole of the gains on the disposals taking place on the same day, the relief that is available goes first to the qualifying beneficiary, with only any balance remaining being available to the trustees.

Example

T is a beneficiary of a settlement and carried on a trade of farming for a period of 4 years until he disposed of his business in May 2010 (at a gain of £1900,000) and claimed Entrepreneurs’ Relief. Part of the land T farmed belonged to a settlement of which he is tenant for life (this being the sole interest in possession). When T disposed of his farming business, the trustees also sold the land giving rise to a gain of £200,000. The beneficiary and trustees jointly claim, see CG63970, for Entrepreneurs’ Relief in respect of the trustees’ gain.

Assuming there have been no earlier disposals by either the qualifying beneficiary or the trustees which qualified for Entrepreneurs’ Relief the amount of relief available is-

    Applicable maximum lifetime allowance Gain eligible for Entrepreneurs’ Relief Chargeable gain
         
Qualifying disposal by beneficiary as individual £1,900,000 £2,000,000 £1,900,000  
(This is the relief due on T’s personal gain)          
  4/9th Reduction     £844,445  
  Chargeable gain on T’s personal gain       £1,055,555
  Unused relief   £100,000    
  Qualifying disposal by trustees £200,000 £100,000    
(This is the relief due on the trustee’s gain)  £100,000        
  4/9th reduction   £44,445    
          £55,555
  Total chargeable gains       £1,211,110