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Entrepreneurs’ Relief with business and property sold together

A recent Tax Discussion Group meeting unpicked the impact on Entrepreneurs’ Relief of selling a business that rented premises owned by its shareholders.

December 2018

An accountant had been asked to advise a client company whose shareholders own the business’ premises in their own names.

He asked whether the shareholders would benefit from Entrepreneurs’ Relief upon selling their company and the premises at the same time. The discussion in the meeting centred around the ‘associated disposals’ clauses of the legislation as well as HMRC’s practice in this area.

The accountant was concerned about the tax efficiency of the mortgage interest his clients were paying. They had been charging rent to their business and this was offset by the mortgage interest and other rental expenses. They had concerns that by paying themselves via the rental of their premises that they were undermining their entitlement to Entrepreneurs’ Relief.

In the discussion it was confirmed that provided they meet all of the conditions, then their shares should attract Entrepreneurs’ Relief. However, for the property, this relief is withdrawn where a market rent is received under the associated disposal clauses, even if the other conditions are met.

Any rent paid increases the rate of tax on the associated disposal from 10% to 20%, with the 20% capital gains tax (CGT) rate due on a full market rent being paid by the company to their landlord owners. If a rent exceeding commercial rates is charged then the excess is added back in the company’s corporation tax and taxed as a dividend, or potentially subject to employment taxes if the owner is an employee and not a shareholder.

It was therefore felt probably more beneficial to sell an associated property used in the business to the limited company in many circumstances. The rate of CGT would be 20% on the gain in value since the acquisition, with the rate of stamp duty land tax (SDLT) being the lower commercial rates rather the residential rates.

The sale consideration could be drawn down from the business without further tax issues, with capital allowances and interest on the borrowings to reduce the amount of corporation tax. The property as well as the business would then be able to be disposed of and benefit from Entrepreneurs’ Relief to reduce the rate of CGT.

Each month (with the exception of July & August) the Tax Discussion Groups [TDG] in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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