In the run up to the Budget, the rumour mill was awash with talk about the possibility of a huge increase in the rate of capital gains tax and the demise of entrepreneur’s relief. But on Budget day, the Chancellor confirmed that the CGT basic tax rate would remain at 18% for the foreseeable future. However, the lifetime limit on entrepreneur’s relief increased from £1,000,000 to £2,000,000 with effect from 6 April 2010.
The unfortunate irony of this is that many entrepreneurs rushed through sales of businesses prior to 23 March in order to beat the anticipated rise in CGT rates.
So what is the current position on entrepreneur’s relief (ER) in the context of traditional partnerships and limited liability partnerships (LLPs)? ER gives an effective CGT rate of only 10% in qualifying disposals, which itself can be further reduced further by any unrelated losses or the annual exemption or possibly another CGT relief.
ER is generally discussed in the context of gains made on the disposal of company shares, however it also applies to:
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gains made on the disposal of all or part of the business; or
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gains made on disposals of assets following the cessation of a business; and
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by certain individuals who are involved in running the business.
The key condition is that for a disposal to qualify as a ‘material’ disposal for the purposes of the availability of ER, the business in question must have been owned by the individual throughout the period of one year ending with the date of the disposal.
Where the business is a partnership or an LLP, it is treated as owned by each individual who is a member of the partnership at that particular time and the disposal by an individual of his interest in the partnership assets is treated as the disposal of the whole or part of the business carried on by the partnership.
There are three circumstances that attract ER for established or new partners:
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where an individual transfers assets to a partnership on the occasion of him joining that partnership and/or the partnership takes over his business;
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where a partner disposes of the whole or part of his interest in the assets of the partnership; and
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where a partner disposes of the business asset, such partner will be treated as if he had owned the whole of the partnership business.
There are several conditions that need be satisfied and restrictions to be considered, when talking about the disposal of a partnership interest or the disposal of business assets related to a business. This is because ER also applies to ‘associated disposals’, which are disposals of assets in connection with a material disposal of a business interest within certain time limits.
ER as we know it, is likely to change at some point in the not-too-distant future; however, the increase in lifetime limits means that many partnerships may consider making disposals sooner rather than later.
For more information on these issues please contact
Sharon Brennan
or your usual Lewis Silkin contact