Provided certain conditions are satisfied, it enables individuals to achieve a 10% (as opposed to 20%) rate of capital gains tax when some or all of a business is sold, up to a lifetime limit of £10 million.
Calls to scrap ER in its entirety were rejected at the last Budget. However, the Finance Bill 2018/19 introduced changes to the conditions for ER which sought to restrict its availability and during the recent election campaign fresh calls have been made for ER to be abolished. Further reform and review of ER is certainly expected to form part of the Budget on 11 March 2020.
In light of the present uncertainty as to the future of ER, family businesses should be taking a closer look at ER and in particular the tax planning opportunities facilitated by a recent First-tier Tribunal (“FTT”) case.
In order to qualify for ER on the disposal of the whole or part of a business, the business must have been owned by the individual as a sole trader or in partnership throughout the period of two years ending with the date of the disposal.
In order to qualify for ER on the disposal of shares in a company, (i) the company must be the individual’s ‘personal company’ (which requires the individual to hold at least 5% of the ordinary share capital and voting rights and be entitled to at least 5% of either the profit on distribution and assets on a winding up or disposal proceeds if the company is sold) and (ii) the individual must be an officer or employee of the company. Both of these conditions must be satisfied throughout the two years preceding the date of the disposal.
It is also possible for trustees to claim ER on the disposal of trust business assets. The following requirements must be established before ER can be claimed on the disposal of trust business assets:
Firstly, the trustees must dispose of ‘settlement business assets’. These are assets which form part of the settled property of the settlement and consist of shares of a company or assets that have been used for the purpose of a business.
Secondly, the individual concerned must be a ‘qualifying beneficiary’ of the settlement. HMRC’s guidance states that a ‘qualifying beneficiary’ is an individual who throughout the two year period ending with the date of the disposal has an interest in possession in the settled property. However, the FTT in the recent case of Quentin Skinner 2005 Settlement L and others v HMRC  UKFTT 516 (TC)) has confirmed that an individual only needs to satisfy that they are a ‘qualifying beneficiary’ at the time of the disposal.
Thirdly, the basic qualifying conditions detailed above which establish the ‘entrepreneurial connection’ between the beneficiary of the settlement and the relevant company must be satisfied throughout the two years ending with the date of the disposal.
Skinner is a welcomed decision and confirms that there are tax planning opportunities for family businesses seeking to utilise each member’s £10m lifetime limit for ER purposes on a sale.
For further advice on ER and other tax planning opportunities for your family business, please contact Sarah Illidge on 0113 228 3277 or firstname.lastname@example.org.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.