FOR capital gains tax, you may be an entrepreneur even if you have never thought of yourself as one.
 

The consequences for anyone in business of failing to comply with the Entrepreneurs Relief (ER) rules can be dramatic, changing the rate of capital gains tax on a business related disposal from 10% to 28%.
 

Taper relief - which served to reduce the rate of capital gains tax (CGT) paid by individuals on disposals of business assets - was abolished in 2008. The new rules are very different.

ER serves to reduce the rate of CGT to 10% on disposals of the whole or part of a business, shares in certain companies and assets used in a business which has ceased.


Behind this simple summary lies huge complexity.


A disposal of shares in a private trading company can attract ER if it is ‘material’ and if the person making the disposal held at least 5% of the shares and was a director or employee for at least a year prior to the
disposal.
 

If you hold shares in a private company and there is any chance of the company being sold, you therefore need to check that you meet the qualifying conditions at least a year ahead of any sale.


If you are a sole trader or partner and you intend to sell up or retire you again need to ensure that you meet the qualifying
conditions.
 

Unlike with taper relief, where a disposal of a single business asset attracted relief, the ER rules are far stricter.
 

ER is due on a disposal of the whole or part of a business.
 

Where only a part of a business is disposed of significant complications can arise.

HMRC will resist claims where the part is not an identifiable, self contained part which is distinct from the continuing business.
 

The relief for disposals of assets used in a business which has ceased is also less than straightforward.
 

The disposal must be within three years of the cessation of trading and the relief may be reduced if the business has paid rent for the use of the asset.
 

If you are in business or hold shares in a private trading company you should check the position with your tax adviser.

Leaving it until you are about to sell up could leave you with a
very unwelcome surprise.

 

  • Paul Aplin OBE is a tax partner with A C Mole & Sons and chairman of the Technical Committee of the Institute of Chartered Accountants in England & Wales Tax Faculty. He and Taunton-based tax partner Amanda Gunter can be contacted on 01823- 624450, Bridgwater based tax partner Paul Kingdom can be contacted on 01278-446088.