CG63975 - Business Asset Disposal Relief: qualifying disposals by individuals
Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.
TCGA92/S169I
Business Asset Disposal Relief is available where a “material disposal” of business assets is made by an individual. This occurs when an individual makes a “disposal of business assets” which is a material disposal - TCGA92/S169I(1).
“A disposal of business assets”
Disposal of assets after cessation: 3 year period
“A disposal of business assets”
“A disposal of business assets” - TCGA92/S169I(2) is —
- a disposal of the whole or part of a business (this is more than a disposal of assets used in a business; it requires the disposal to be of all of a business or a clearly identifiable part of it - see CG64015); or
- a disposal of assets, or of interests in such assets, which were used for the purposes of a business that has now ceased, provided they were in use for those purposes at the time of cessation; or
- a disposal of shares in or securities of a company, or of an interest in such shares or securities.
A “material disposal”
Each of the disposals of business assets as above constitutes a “material disposal” when:
- In the case of a disposal of the whole or part of a business, the business is owned by the individual making the disposal throughout two years leading up to the date of the disposal - TCGA92/S169I(3);
- In the case of a disposal of assets, or of interests in such assets, used for the purposes of a business that has now ceased:
- the assets were in use for those purposes at the time of cessation, and
- the business was owned by the individual making the disposal for a period of two years immediately prior to the cessation of the business, and
- the disposal takes place within three years of that cessation - TCGA92/S169I(4).
- In the case of a disposal of shares in or securities of a company, or of an interest in such shares or securities, either Condition A or Condition B in TCGA92/S169I(6) & (7) is met - TCGA92/S169I(5). These conditions are as follows:
Condition A, that throughout the period of two years ending with the date of the disposal- TCGA92/S169I(6):
Condition B, that where the company has, within the three year period ending with the date of disposal, ceased to be either a trading company or a member of a trading group, relief is available if Condition A above was satisfied throughout the period of two years ending with that cessation - TCGA92/S169I(7). This does not necessarily mean that the trade ceases but rather that the company no longer meets the definition. This does not apply where the company ceases to be a trading company but becomes a member of a trading group, or vice versa.
Condition A can be satisfied if throughout part of the period of two years the company was a trading company and throughout the remainder of the period was the holding company of a trading group.
Up until 28 October 2018, Condition A would not be failed where another share transaction takes place earlier on the same day as the disposal which results in the 5% shareholding requirement not being met at the time of the disposal. From 29 October 2018, Condition A would be failed in those circumstances if the individual did not meet the economic interest requirement – see CG64051.
There is no de minimis limit for the reduction in shareholding that constitutes a material disposal under TCGA92/S169I(2)(c).
Shares owned jointly or in common
Condition A and B can be met if shares are owned jointly or in common. The individual is treated as holding so many shares as is proportionate to the value of their share. They must still meet the other criteria personally. If during the one year period the shares were held by members of an LLP for a part of it and directly by those members for the duration, the one year holding requirement will be met if there is no break between those periods so that the individual is treated as holding the shares throughout.
Throughout the period of 2 years
The legislation refers to conditions which are met “throughout the period of two years”. The date on which that period ends is the last day of that 2 year period so for example, if the last day is 17 April 2019, the first day of the period was 18 April 2017.
Enterprise Management Incentives
- For disposals on or after 6 April 2013 the relief is also available on the disposal of shares in a company where the “personal company” requirement is not met but the shares were acquired by the individual on the exercise of an option granted under the Enterprise Management Incentives (EMI) scheme. See CG64052 for detailed guidance.
Condition C and Condition D largely replicate conditions A and B but apply to EMI shares acquired on or after 6 April 2012. Relief may be due if the disposal is at least 2 years after the EMI option was granted and the employment requirement has been met during that two year period - see CG64052. Note that it may be necessary to make an election to apply these rules to EMI shares acquired during the 2012-13 tax year.
Re-organisation of share capital
Where shares or securities (“original shares”) are exchanged for other shares or securities (“new holding”) in the course of a reorganisation of share capital within TCGA92/S126 , TCGA92/S127 treats the transactions as involving no disposal of the original shares nor acquisition of the new holding received see CG51700+. Instead, the original shares and the new holding following the transactions are treated as the same asset, acquired as the original shares were acquired. TCGA92/S127 also applies (by virtue of TCGA92/S135 or S136 and subject to certain conditions) where shares or debentures are issued by a company in exchange for shares in or debentures of another company, or in a company reconstruction such as when the businesses and shareholdings of 2 companies are merged or a company demerges part of its activities into a new company which issues shares to the shareholders of the original company see CG52500+.
These rules are important in cases where both the original shares and new holding are of shares in companies which qualify as the individual’s personal company. Assuming there is no election under TCGA92/S169Q (see CG64155), Business Asset Disposal Relief may be due by looking through the exchange (to which TCGA92/S127 applies) to ascertain whether all the conditions of section 169I(6) have been met throughout the two year holding period in relation to each company.
Partnerships/LLP
Business Asset Disposal Relief is also available on a material disposal where the individual carries on business as a member of a partnership. TCGA92/S169I(8) provides that—
- where an individual who carries on a business as a sole trader and then takes on a partner or partners in that business, any disposals of his interests in the business assets which he contributes to the partnership can be treated as disposals of a part of the business;
- where an individual, who carries on business as a member of a partnership, disposes of all or part of his interest in the assets of the partnership that disposal can be treated as a disposal of the whole or part of the partnership business; and
- each individual who is a partner in a business at any time is treated as owning the business carried on at that time by the partnership.
A partner may therefore be able to claim Business Asset Disposal Relief on
- a disposal of the whole of their interest in the partnership - by treating it as a disposal of the whole of a business; or
- a disposal of part of their interest in the partnership - by treating it as the disposal of part of a business; or
- a disposal BY THE PARTNERSHIP of the whole or part of the partnership business - by treating the business as owned by the individual; or
- a disposal BY THE PARTNERSHIP of shares - by treating the disposal as having been made by the partners; or
- a disposal of partnership assets within the permitted period, see above, following the cessation of the partnership business - by treating the business as owned by the individual partner.
An individual, who carried on a business on his own account, may also qualify for Business Asset Disposal Relief, when his or her business becomes a partnership.
Disposal of assets after cessation: 3 year period
The 3 year period mentioned in the second bullet above is a statutory limit. HMRC have no discretion to extend the period.
The date of the cessation of a business is a question of fact. Determining the date will usually be straightforward but for less clear cut cases when there is a wide difference between possible dates, and this is material to a claim for Business Asset Disposal Relief, there is guidance in the Business Income Manual to assist you. See BIM80565+.
Change to 2 year period {#}
For disposals before 6 April 2019, the qualifying conditions had to be met throughout a period of one year rather than two.
For disposals on or after 6 April 2019, if the relevant period ends with the date of cessation of a business then the change to 2 years does not apply if that date is before 29 October 2018.
For disposals on or after 6 April 2019, if the relevant period ends with the date when a company ceases to be a trading company (or a holding company ceases to be the holding company of a trading group) then the change to 2 years does not apply if that date is before 29 October 2018.