CG63995 - Entrepreneurs’ Relief: qualifying “associated disposals” by individuals

TCGA92/S169K

Entrepreneurs’ Relief may also be due where there is a disposal of an asset owned by an individual but used for the purposes of a business carried on by either -

• a partnership in which the individual is a partner or
• a company which is the individual’s personal company.

This will be “a disposal associated with a relevant material disposal” (or associated disposal) when all three of the following conditions are met – TCGA92/S169K(1)

Condition A. That an individual disposes of:

• all or part of his interest in the assets of a partnership, or
• shares in, or securities of a company (or interests in such shares or securities),

and this disposal is a material disposal of business assets. (There is no requirement either for a gain to arise on this disposal or for a claim to Entrepreneurs’ relief to be made in respect of any gain that does arise).- TCGA92/S169K(2) - and

Condition B. That the associated disposal is made as part of the process of withdrawal of the individual from participation in the business of the partnership or the trading company (or a company that is a member of the trading group of which the company is a member). See the discussion below of what withdrawal means – TCGA92/S169K(3) - and

Condition C. That the assets disposed of by the individual in the disposal, which is the associated disposal, had been used for the purposes of the partnership business or company business throughout a period of 1 year ending with

• either the date of the material disposal of business assets
• or, if earlier, the cessation of the partnership or company business – TCGA92/S169K(4).

Withdrawal from business

Condition B is the requirement that the “associated disposal” and the “material disposal of business assets” are linked. The condition is satisfied when those disposals together constitute part of the process of “withdrawal from participation in the business”.

Relief will not be due unless the disposal of an asset (held outside the partnership or company) is related to the individual’s reduction of his or her 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 actually 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 shares are 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.

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, or
• 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 3 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.