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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Entrepreneurs’ Relief - calculation - restrictions on relief for “associated disposals”

TCGA92/S169P

Where certain “associated disposals” are made under TCGA92/S169K (see CG63995) the amount of the gain qualifying for Entrepreneurs’ Relief may be subject to restrictions where any of a number of conditions are met.

Where any of the conditions in TCGA92/S169P(4) are met, only part of the gain on an associated disposal which would otherwise be taken into account for Entrepreneurs’ Relief, shall be taken into account, and the balance will remain a chargeable gain without benefiting from the relief. The amount to be taken into account for Entrepreneurs’ Relief is such an amount of the gain as is just and reasonable with regard to the relevant factor - TCGA92/S169P(1)-(5).

The conditions that can result in restriction are:

  • where the asset(s) which are the subject of the associated disposal were used for the purposes of the business during only part of the period for which they were owned by the individual making the disposal.

    • The adjustment will reflect the length of the period of business use.
  • where only a part of the asset(s) which are the subject of the associated disposal was in use for the purposes of the business for the period they were owned by the individual making the disposal.

    • The adjustment will reflect the part of the assets that was used for business purposes.
  • where the individual making the associated disposal was involved in the carrying on of the business (whether this was personally, as a partner, or as an employee or officer of the individual’s personal company) for only part of the period for which the assets which are the subject of the associated disposal were in use for the purposes of the business.

    • The adjustment will reflect the length of the period for which the individual was involved in the carrying on of the business.
  • where the whole or part of the period falling after 5th April 2008 (see FA2008/Sch 3 Para 6) for which the asset(s) which are the subject of the associated disposal were used for business purposes, they were available for that use only on payment of rent (and so were to an extent investments, rather than being employed solely for the purposes of the business).

    • The adjustment will reflect the extent to which the rent paid for periods after 5th April 2008 is less than the full market rent for the assets.
    • “Rent” in relation to an asset, for the purposes of Entrepreneurs’ Relief, is defined at TCGA92/S169S(5) and includes any form of consideration given for use of the asset.

What is considered a ‘just and reasonable’ adjustment in the context of TCGA92/S169P (5) will depend on the facts of the particular case. It is possible that two or more of the above conditions may be in point. A reasonably broad approach should be adopted aiming at arriving at a proportion that is equitable in the circumstances.

You should not seek an adjustment where the conditions in TCGA92/S169P(4) are met only occasionally or to a trivial extent.

In particular, no adjustment is required for periods when an asset is not in active use for the business if this is simply a reflection of the seasonal nature of a particular activity.

Example 1

In 2012 E inherited a mill that had been used in the business of his family’s company (his ‘personal company’) for nearly 100 years. The company continued to use the mill, for which E charged no rent, for 10 years until the company was taken over at which time E sold his shares and the property.

E’s sale of the mill was an ‘associated disposal’ in relation to the ‘material disposal’ of his shares in the company. Various members of E’s family had owned the mill throughout its 100+ year life throughout which it was used continually in the company business. All, apart from E himself, had charged a market rent. However, the gain on which E is chargeable accrued only over the period he owned the property. In these circumstances it would be ‘just and reasonable’ to have no regard to the payment of rent for the period before E acquired the mill and the gain available for Entrepreneurs’ Relief should not be restricted.

Example 2

On 5th April 2010 M, leaves the partnership of which he has been a member for 12 years and sells his one-third partnership interest, to the remaining two partners, making a gain of £250,000. Throughout that 12 years M has personally owned the property from which the firm has traded. For the last 6 of those years (since 6th April 2004), the partnership paid him a full market rent for its use. At the time he leaves the business he also sells the property to the remaining partners, making an ‘associated’ gain of £100,000. He claims Entrepreneurs’ Relief - all the conditions are met and there has been no previous claim.

  • If no adjustment was made in respect of the rent, relief would be due on both gains totalling £350,000.

The chargeable gain after Entrepreneurs’ Relief will therefore be - £350,000 - (4/9 x £350,000 = £155,556) = £194,444

  • However because for 6 of the total 12 years he was a partner a full market rent was paid to M for the business use of the property a proportion of the gain relating to the premises will not attract relief. Only the period for which rent was paid after 6th April 2008 can be taken into account. This would be 2 of the 12 years the property was in use for the business. A ‘just and reasonable’ amount in these circumstances would be:-
Total gain on sale of property £100,000 Qualifying for relief
     
Gain accruing for 10 years of use from 6th April    
1998 to 5th April 2008 £100,000 x 10/12 £83,334 £83,334
Gain accruing for 2 years of use from 6th April    
2008 to 5th April 2010 £100,000 x 2/12 £16,666 £0
Gain on property attracting Entrepreneur’s Relief   £83,334
Gain on disposal of partnership interest   £250,000
Total gain attracting Entrepreneur’s Relief   £333,334

The chargeable gain after Entrepreneurs’ Relief will therefore be - £350,000 - (4/9 x £333,334 = £148,148) = £201,259.

  • If however the rent paid by the partnership to M was only two-thirds of a full market rent the ‘just and reasonable’ amount must take this into account:-
Total gain on sale of property £100,000 Qualifying for relief
     
Gain accruing for 10 years of use from 6th April    
1998 to 5th April 2008 £100,000 x 10/12 £83,334 £83,334
Gain accruing for 2 years of use from 6th April    
2008 to 5th April 2010 £100,000 x 2/12 (one    
third qualifies for relief) £16,666 £5,555
Gain on property attracting Entrepreneur’s Relief   £88,889
Gain on disposal of partnership interest   £250,000
Total gain attracting Entrepreneur’s Relief   £338,889

The chargeable gain after Entrepreneurs’ Relief will therefore be - £350,000 - (4/9 x £338,889 = £150,617) = £199,383.

Where any form of rent has been charged at any time for the use of the property, the taxpayer or agent should be asked to provide a computation on the lines above. They should also give their view of the average market rent for the period concerned. Advice may be sought from the Valuation Office Agency on rental values.

Valuation Office Agency

Send the estimate of the market rent and the relevant correspondence to the Valuation Office Agency (see CG74000+). Ask them:

  • either to confirm that the estimate is not excessive
  • or else to give their view of the average market rent.

To assist the Valuation Office Agency you should provide as much information as possible regarding

  • the nature of the tenancy under which the property has been let, and
  • the terms on which it was let, including who had responsibility for repairs etc.

If the taxpayer disputes the Valuation Office Agency’s opinion of the average market rent you should resubmit the case and ask them to negotiate with the taxpayer’s representative with the aim of achieving agreement on a figure of the average market rent for the relevant period.

The reasons for the submission should be explained and the following details provided

  • the average market rent figure put forward on behalf of the taxpayer
  • all documentary evidence provided in support of that figure and copies of all relevant correspondence
  • the precise period during which the property was owned
  • details of the figures originally supplied by the Valuation Office Agency
  • the difference, in terms of tax, between the figures supplied by the Valuation Office Agency and the taxpayer
  • the name and address and reference of the taxpayer’s agent and valuer (if any).