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Entrepreneurs’ relief on disposal of a surgery

Entrepreneurs’ relief (ER) is designed to give relief for capital gains tax on the disposal of interests in businesses and this relief may be extended to assets used in those businesses. This article examines the difficulty in obtaining relief for the disposal of a business asset, such as the surgery building, while the business is ongoing.

In the current climate, where practices are finding it difficult to attract new partners, property owning partners in particular, and where many practices are merging into shared premises or entering into sale and leaseback arrangements ER, and how to get it, is never far from our minds.

Sole practitioners

For a sole trader the position is simple, they cannot have ER for the disposal of a mere asset such as the surgery building. Relief is only available where the individual makes a disposal of business assets (s169I(2)) and that disposal is a material disposal of business assets (s169I(3) and (4)). Broadly speaking, the relief will only be available on the disposal of the surgery building when the business has ceased in the previous 36 months. This is because the building is not likely to be considered to be the whole or part of a business.

Partnerships

On the face of it life is a bit easier for partners in partnership. They too may obtain relief for the disposal of the whole or part of a business or for an asset owned personally when the business ceases if it is sold within 36 months. However, what makes matters a little easier for them is that they may also claim relief for an asset owned personally and used by the partnership and disposed of as part of withdrawal from the business.

This means that where the surgery is owned outside the partnership and is not a partnership asset (for example when held by a subsection of partners with a formal lease to the trading partnership) then a disposal may attract relief if the partner in question can reduce his share in the partnership in the 36 months before the sale of the building. However, see comments about restriction of the relief for the payment of rent below.

Such a reduction in a partner’s interest in the partnership must be at least 5% of the partnership as a whole (rather than 5% of their share).

In addition “arrangements” must not exist for that partner to regain an interest in the partnership assets later.

Of course if a partner has fully retired from partnership in the three years before the sale of the surgery then ER would be available to them provided they had at least a 5% interest. There is a further relaxation for those partners who reduced their interest over a few years winding down to retirement as long as for three years in the last eight they had at least a 5% interest. 

Surgeries which are partnership assets on the balance sheet (or on the balance of all the facts) will be subject to the same issues, when it comes to claiming the relief, as those owned by a sole trader. The issue is once more likely to be that the disposal of the surgery is a disposal of a mere asset rather than the disposal of the whole or part of a business.

In all cases remember the general ER requirements:

  • The business needs to have been owned for at least one year (this does not mean that the building has to have been owed for a year.
  • The payment of rent - if rent is paid by the partnership to the owners for periods after 5 April 2008 then ER will need to be restricted accordingly. 
  • Not used exclusively by the partnership – if some of the property is let to a third party remember that a restriction will be required for that.
  • Not used by the partnership throughout ownership – again a restriction will be required.

Claire Hebdige
Tax Manager, Dodd & Co Chartered Accountants