Entrepreneurs’ relief changes affect family businesses

Family businesses are being unfairly penalised by changes to entrepreneurs’ relief (ER), according to the Institute of Chartered Accountants in England and Wales (ICAEW) Tax Faculty.

The amendments, passed into law through the 2015 Finance Act, prevent retiring partners from claiming ER if they are associated with people in the purchasing business.

Likewise sole traders are unable to claim ER if they dispose of their business to an associated person or company.

The measures were designed to prevent business owners from unfairly claiming ER by disposing of business assets while retaining ownership.

In a letter sent to HMRC, the ICAEW Tax Faculty argues that the new rules have had a negative impact on normal business transfer arrangements such as during succession planning among family businesses.

In a father-son partnership, for example, a retiring father passing the business to his son would not be able to claim ER on the disposal because his son is associated with the company – despite engaging in a genuine transfer arrangement.

Passing on businesses to other family partners in this manner is common among family enterprises. However, the new rules fail to differentiate between genuine transfer arrangements and those designed to unfairly extract money from the business at a discount capital gains tax (CGT) rate.

The faculty wrote in its letter:

“We can see no policy reason for such restrictions on a genuine retirement.”

“It was clear from the December 2014 announcements that the target was tax advantaged corporations with no real change in economic ownership. Instead, this restriction merely prevents a business transfer arrangement which is a common means of continuing a family business.”

Entrepreneurs’ relief: eligibility

You are entitled to a reduced 10% capital gains tax rate upon disposal of your business (instead of 28%/18%) if you qualify for ER.

In order to qualify for the relief you must:

• be a business partner or a sole trader
• have owned your business for a minimum of 1 year before selling
• sell or dispose of business assets within 3 years of selling the business.

ER is only available on certain qualifying assets. These include:

• all or part of the business
• company shares (if you own at least 5% of shares and have voting rights)
• assets lent to the business.

Contact us to discuss how the changes could affect your succession planning.