This generous relief applies to sales of a whole business or part of a business. This relief does not apply to the disposal of assets. There are specific circumstances under which the relief can apply to such a disposal, but these are related to the disposal of the business in which the asset is used.
Entrepreneurs’ relief is a lifetime limit for a reduced rate of CGT. As this is a lifetime limit each disposal uses up relief which would otherwise be available for subsequent disposals. The types of disposal which attract relief are:
- The sale by a sole trader of his or her business as a going concern (including incorporating it)
- The sale of chargeable assets which were used by a sole trader in his or her business, which has ceased trading within the last three years
- The disposal by a partner in a partnership of his share in the firm, or of part of his or her share, and
- The disposal of shares and securities in a company, to which further conditions apply.
Where the business disposed of is run through a company, the disposer must own at least 5% of the ordinary share capital of the company which must entitle him or her to 5% of the votes; he or she must be an officer or employee of the company, and the company must be carrying on trading activities, and to no substantial extent any other activities.
This requirement about the company’s activities, is the same test as previously applied under taper relief, so if your company qualified for business asset taper relief, it also qualifies under the new rules. There is also relief available on the proceeds of winding up or dissolving a former trading company, provided this is done within three years of ceasing trading activities.
EMI shares attract entrepreneurs’ relief even where the owner has less than 5% of the shares in the company, and the period of time when the EMI shares were held as options counts towards the ownership period on sale, so that EMI shareholders can usually benefit from the relief as soon as they convert the options into shares, provided they are held for 12 months as options.