Maximising entrepreneurs' relief

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Maximising entrepreneurs' relief
  • Spouses / civil partners
  • Family members
  • Assets disposed of within three years of cessation
  • Associated disposals ― rent for use of assets
  • Shares acquired from share option schemes

The conditions which must be met to qualify for entrepreneurs’ relief are discussed in the Entrepreneurs' relief guidance note. This guidance note discusses ways of maximising entrepreneurs’ relief claims.

Spouses / civil partners

Under independent taxation, both spouses and civil partners are entitled to claim the relief separately and this offers an opportunity to double the lifetime limit.

Therefore, serious thought should be given to bringing a spouse or civil partner into the business. For example, a sole trader might bring in his or her spouse to form a partnership by transferring to the spouse a proportion of the business in return for the spouse performing a limited function in the business. Gains on the eventual disposal of the partnership business would then be spread between the spouses, thereby maximising entrepreneurs’ relief.

In the case of a company, one spouse could transfer 5% or more shares to the other spouse who would then work part-time for the business. Again this would have the effect of enabling both spouses to claim the relief on the disposal of the shares.

However, you should be aware that HMRC may argue that the settlements legislation applies to such a transfer (of company shares or a share in the partnership). See the Income shifting and Income shifting ― where are we now guidance notes for further information.

Spouses’ shares

The 5% minimum shareholding requirement (needed for the company to be an individual’s ‘personal company’) can only be made up of directly owned shares; shares owned by the individual outright. Shares held by associates, even those of spouses or civil partners, are not taken into account. This means, for example, that if a husband holds 4% of a company and his wife owns 2%, neither of them will be entitled to entrepreneurs’ relief on the disposal of their shares.

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