Taxpayers who sell their business will generally be aware that capital gains tax is payable on any gain, and that entrepreneurs’ relief (ER) can reduce the rate of CGT due. However, the taxpayers may not appreciate the detailed conditions needed for ER to apply.
This is where you need to step in with timely and accurate advice.
For an unincorporated business you should first check who owned what proportion of the business, and for which periods. For ER to apply there is a 5% ownership threshold to meet for company and partnership shares, although this is subject to variations for retiring partners and diluted shareholdings.
The next point to clarify is whether the business was trading for at least a year up to the date of disposal, or cessation of the trade. This period is now two years for disposals made on or after 6 April 2019.
The Potter case, (see our newsletter 10 October 2019), examined whether a period of very low activity with no actual sales could be considered to be trading. The FTT decided the minimal activity was trading, and crucially there was no investment activity in that period, so the Potters’ ER claim was upheld.
Letting out property is nearly always regarded as an investment activity rather than trading, so where the business has been letting property you need to look for other activities which could be trading. The recent case of Stephen & Lynne Reneaux illustrates this problem.
The couple jointly owned two commercial units which were used for Stephen’s business until 2003. For the next 10 years the income from letting the units was reported as rental income inequal shares on the couple’s tax returns. The units were sold in 2013, and the individuals both claimed entrepreneurs’ relief on their share of the gain.
The FTT looked for substantial activity associated with the letting of the units which could be regarded as a trade, but concluded that the activities required to generate income from the units did not amount to a trade. The ER claims were rejected.
Written by the Tax Advice Network