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Reflections on entrepreneurs' relief

Farmers have been able to claim entrepreneurs’ relief (ER) on qualifying gains made since 5 April 2008, paying just 10% tax. This article reflects on the conditions with references made to case decisions.

These conditions are found in sections 169H to 169SA of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and points to watch include:

1) The definition of a business asset

There must be a material disposal of a business asset but don’t be misled into believing that ER is available on all sales of a business asset. HMRC’s definition of a disposal of business asset is found in section 169I(2) TCGA 1992 and is:

a. A disposal of whole or part of a business

The First Tier Tax Tribunal (FTT) considered this in the farming case of Russell (2012) TC 02299. 6.72 hectares of a 21.65 hectare farm were sold but the partnership continued to farm the retained land in the same manner after the sale. The FTT held that this was a disposal of a business asset and not the disposal of part of a business denying the claim for ER.

b. A disposal of an interest in one or more assets in use for business purposes at a time when a business ceases or 

Here ER is available if the asset is sold within a set time after the business cessation but not if sold prior to the business cessation. One difficulty for farmers is the delay between exchange of contracts (the date of the disposal for capital gains tax) and completion. Given the amount of tax at stake, the writer has tended to err on the side of caution.  The cessation of trade, whether by sale to a third party or by transfer to a company, has been timed to coincide with the exchange of contracts. This has involved arranging to sell growing crops along with the land and, in one case, advising a client who sought advice too late that their maize crop would need to be left untended and unharvested. Caution that may prove to be valuable in this case as the Revenue have opened an enquiry requesting copies of numerous documents including farming related invoices together with the farm plan. 

c. A disposal of shares in a personal trading company or holding company or a trading group

To qualify under this heading, throughout the 12 months prior to the date of sale:

  • The company must be a trading company or the holding company of a trading company and
  • Putting to one side the relaxations for shares acquired using EMI options; the shareholder must be:
    • an officer or employee of the company 
      Cases
      Moore (2016) TC 04903 – taxpayer held not to be an officer or employee during the required period and ER denied
      Hirst (2014) TC 04038 – although taxpayer had resigned as director prior to the sale of his shares FTT held he continued to be an employee as he continued to provide substantial services to the company and to be under the control of the company.
    • owning at least 5% of the ordinary share capital carrying at least 5% of the voting rights.
      Watch the definition of ordinary share capital. This means ‘all of the company’s issued share capital (however described) other than capital carrying a right to a dividend at a fixed rate but no other right to share in the company’s profits’. (Section 989 Income Taxes Act 2007)
      Cases
      McQuillan (2016) TC 05074 [in which it was held that shares with no dividend rights have a right to a dividend at 0% and can be outside the definition of ordinary capital]  
      Castledine (2016) TC 04930 [in which it was held that deferred shares are within the definition of ordinary share capital].

2) Rules for associated disposals

Farmers frequently own the farm land and farm buildings personally with these farmed by a partnership of which they are a member or a company in which they own shares.  Additional ‘associated disposal’ conditions, found in section 169K TCGA 1992, need to be satisfied for gains on these personally owned assets to qualify for ER.

For disposals on or after 18 March 2015 there are minimum disposals of interests in partnerships and companies required to link to the sale of personally owned land and buildings together with the requirement that the land and buildings must have been held for a minimum period of three years prior to the sale.  Conditions A to D in S169K TCGA 1992 must all be met:

Condition A

A relevant material disposal of business assets is made which meets:

Condition A1 The disposal is of at least a 5% interest in a partnership (interest is taken as the entitlement to share in the capital profits) and no partnership purchase arrangements exist. (Partnership purchase arrangements means arrangements under which the owner or a person connected with the owner interest in the partnership increases.) Or,

Condition A1A The disposal is of the whole of the interest in a partnership and 
  • The interest is less than 5% and
  • A 5% interest has been held for a continuous period of 3 years in the last 8 years and
  • No partnership purchase arrangements exist. Or,

Condition A2 The disposal is of at least a 5% interest in the ordinary shares of a trading company which carry at least 5% of the voting rights and no share purchase arrangements exist. (Share purchase arrangements mean arrangements under which the owner or a person connected with the owner is entitled to acquire shares in the trading company or group). Or,

Condition A3 The disposal is of at least a 5% interest in the securities of a company and no share purchase arrangements exist.  And

Condition B

the disposal must be part of the taxpayer’s withdrawal from participation in the trade of the partnership or company.

Condition C

The personally owned land must have been used for business purposes throughout the period of 1 year ending with both the disposal of the personally owned land and the relevant material disposal of a business asset. 

Condition D

The personally owned land must have been owned for a period of at least three years.

In conclusion, there are a multitude of conditions to meet and timings to watch if you are to be successful in claiming ER for your client. Early planning is essential.

Elizabeth Peters, Tax Partner, Ballard Dale Syree Watson LLP

Farming and Rural Business Group, September 2017