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Tax Reliefs Demystified

June 5, 2013

Posted by Simon Misiewicz on 5th June 2013

Would you like to know how to mitigate your tax now and in the future?

Is today the day that you pause and identify the activities to save your future from tax?

Tax is complex. Tax is difficult.

We do not have enough time in the day for research.

Are these good reasons not to take action and to let tomorrow be what others want it to be?

No. There are many ways that you can take simple and effective steps to help reduce your tax in the future.

Below are just some examples of how you can do this.

Entrepreneurs’ Relief (1)

This relief provides relief to people that dispose of the assets listed below:

·Shares in a business
·Sole trader business
·Partnership

You must own the business at the date the business was sold or the date that is ceased trading.

I think this goes without saying unless you are going to sell someone else’s business.

You must make a claim to HMRC in writing by the first anniversary of the 31 January following the end of the tax year in which the qualifying disposal takes place, that is one year and 10 months from the end of the tax year in which the qualifying business disposal is made.

For a qualifying business disposal in the tax year 2012–13 (ending on 5 April 2013) you must make a claim for Entrepreneurs’ Relief by 31 January 2015.

Trustees of a settlement: A claim by the trustees of a settlement must be made jointly with the qualifying beneficiary for a trustees’ disposal.
Joint claims may be made to us in writing or by filling in the form on page 12 of this help sheet.

Section A should be completed by the qualifying beneficiary and the trustees should complete Section B.

Example 1

Mrs T stopped trading and in July 2011 sells an asset of the trade making a gain of £75,600. The gain qualifies for Entrepreneurs’ Relief, and she has no other gains or losses.

Capital Gains Tax is due on £65,000 (£75,600 less Annual Exempt Amount £10,600).

At the Entrepreneurs’ Relief rate of 10 per cent her Capital Gains Tax due is £6,500.

Example 2

You have been a partner with three other persons in a trading business for several years.

Each partner had a 25% interest in the partnership’s assets.

On 31 December 2012 you retire and dispose of your 25% interest in the assets of the business, which continues, to the other partners.

You make gains of £125,000 on the disposals of your 25% share of the business goodwill and premises.

All of your gains will qualify for Entrepreneurs’ Relief because you have disposed of the whole of your interest in the assets of the partnership.

Example 3

In September 2012 you dispose of the shares you had owned for the last 20 years in a company of which you were a director.

You owned 20% of the shares of the company that entitled you to 20% of the voting rights. You made a gain of £860,000. The company had been a trading company but its trade ceased in August 2010 and the company then ceased to qualify as a trading company.

Your gain will still qualify for Entrepreneurs’ Relief because the disposal was made less than three years after the company ceased to qualify as a trading company.

For 2012–13 this ‘net gain’, up to the lifetime limit, is then chargeable at the Entrepreneurs’ Relief rate of Capital Gains Tax (CGT) of 10%.

Business Asset Roll-Over Relief (BPR) (1)

You may be able to claim BPR if you are intending to sell one asset at a profit and re-invest it into another asset.

The claim must be made of assets that are used in your trade.

Please note I have written another article on the subject of Elizabeth Moyne Ramsay v HMRC whereby HMRC did not agree with the fact that property is a business but an investment and as such does not qualify for BPR.

There are different additional conditions for different types of disposal. For example, land and buildings must be occupied as well as used for your trade. Therefore houses donot qualify but guest house and hotels do.

You must buy the new asset between one year before and three years after the date you disposed of the old asset.

Example 1

You bought a freehold office for £45,000 and sell it for £75,000. You make a gain of £30,000.

You reinvest all of the proceeds in new freehold business premises costing £90,000.

You can postpone the whole of the £30,000 gain made on the sale of the old office, as you have reinvested all of the proceeds.

When you sell the new business premises and work out your Capital Gains Tax bill, you’ll treat the cost of the new premises as £60,000 (£90,000 less the £30,000 gain).

Example 2

You bought a freehold office for £50,000 and sold it for £100,000.

You made a gain of £50,000.

The new business premises cost £80,000.

The office was disposed of for £100,000 and you reinvested £80,000.

The amount not reinvested is £100,000 – £80,000 = £20,000.

The amount of the gain that you can postpone is restricted.

You deduct the amount not reinvested (£20,000) from the gain (£50,000).

You can postpone the difference of £30,000 (£50,000 – £20,000 = £30,000).

When you sell the new office and work out your Capital Gains Tax bill, you’ll treat the cost of the new business premises as £50,000 (£80,000 less the £30,000 gain postponed).

Example 3

You bought a freehold shop for £80,000 and sell it for £100,000, reinvesting all of the proceeds in a new asset.

You make a gain of £20,000.

But you’ve only used the shop in your trade for five years out of the ten years you’ve owned it. Therefore it only qualifies as a business asset for 50 per cent of the time.

You can only postpone 50 per cent of the gain, so the postponed gain is £10,000 (50 per cent of the £20,000 gain).

You’ll need to work out the Capital Gains Tax due on £10,000 (the remaining 50 per cent of the gain).

Business Property Relief – Selling your business to your own limited company

If you are a sole trader or in a partnership you can sell your business to a limited company that you own (or jointly) and claim BPR.

You must transfer all the business, including all its assets (other than cash), as a going concern in return for shares in the company.

You don’t have to claim Incorporation Relief. If it’s due, you will receive it automatically.

You only work out the tax due when you sell or dispose of the shares received.

Example

You’re a sole trader and incorporate your business, transferring all of the assets in return for shares. You receive 1,000 £1 ordinary shares in the new company ABC Ltd with a market value of £100,000. You make a gain of £60,000 on the assets you disposed of to the company. 

You receive Incorporation Relief automatically, so you don’t pay Capital Gains Tax on the gain made at that time.

You later dispose of the shares and work out the gain. 

You take the cost of the shares as £100,000 less the £60,000 original gains, therefore, the cost of the shares to include in your calculations is £40,000. (£100,000 – £60,000 = £40,000).

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References:
(1)Capital Gains Tax Reliefs For Business Assets



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk