Associated Disposals

Changes in the March Budget which were subsequently forced through Parliament saw changes to the Entrepreneurs' Relief (ER) rules on associated disposals.

The original ER rules did not specify any proportion of partnership interest or shares which had to be disposed of to allow an associated disposal to qualify for relief.

 

Out with the old

The old rules required that Conditions A, B and C were met.

• Condition A was that an individual made a material disposal of business assets which consisted of the disposal of the whole or part of the individual's interest in the assets of a partnership or the disposal of (or of interests in) shares in or securities of a company.
• Condition B was that the individual made the disposal as part of the withdrawal of the individual from participation in the business carried on by the partnership or by the company, or a company which is a member of the trading group.
• Condition C was that, throughout the period of a year ending with the earlier of the date of the material disposal of business assets and the cessation of the business of the partnership or company, the assets which (or interests in which) are disposed of were in use for the purposes of the business.

In with the new

The rules have now been amended. There is a disposal associated with a relevant material disposal if Condition A1, A2 or A3 is met and Conditions B and C are met.

• Condition A1 is that an individual makes a material disposal of business assets which consists of the disposal of the whole or part of that person's interest in the assets of a partnership, the disposed of interest is at least a 5% interest in the partnership's assets and, at the date of the disposal, no partnership purchase arrangements exist.

• Condition A2 is that an individual makes a material disposal of business assets which consists of the disposal of shares in a company, all or some of which are ordinary shares, and at the date of the disposal the ordinary shares disposed of constitute at least 5% of the company's ordinary share capital, carry at least 5% of the voting rights in the company and no share purchase arrangements exist.

Condition A2 is not met if the disposal of shares is a disposal by under s122 TCGA 1992 (i.e. a capital distribution), other than such a disposal treated as made in consideration of a capital distribution which is made in the course of dissolving or winding up the company.

• Condition A3 is that an individual makes a material disposal of business assets which consists of the disposal of securities of a company and, at the date of the disposal, the securities disposed of constitute at least 5% of the value of the securities of the company and no share purchase arrangements exist.

Anti-avoidance

'Partnership purchase arrangements' means arrangements under which the individual (or connected person) is entitled to acquire any interest in, or increase that person's interest in, the partnership.

'Share purchase arrangements' means arrangements under which the individual (or connected person) is entitled to acquire shares in or securities of that company or a company which is a member of the same trading group.

Condition B is also amended. A disposal is not treated as part of the individual's withdrawal from participation in the business if, at the date of disposal, there exist any partnership purchase arrangements. A disposal is not treated as part of the individual's withdrawal from participation in the business carried on by a company if, at the date of that disposal, there exist any arrangements under which the individual (or connected person) is entitled to acquire shares in or securities of that company or a company which is a member of the same trading group.

The changes have effect in relation to disposals made on or after 18 March 2015.

Clarification?

My original feeling was that these were welcome changes. It had never been clear what percentage interest/shareholding needed to be disposed of to trigger the rules. However, my eye was then caught by the anti-avoidance rules. What were these aimed at, as there are no HMRC examples?

I contacted HMRC about this, giving them a couple of examples, and here are the answers.

Example 1

Question G owns the shares in a company and also a property which is used by the company for business purposes. G gifts 5% of his shares to his wife and sells the property to a third party.

HMRC reply The gift of the shares is NOT a share purchase arrangement because a gift does not create any entitlement to acquire the shares by G's wife. Having an entitlement is a pre-requisite for there to be a share purchase arrangement.

Therefore the associated disposal rules would apply to the disposal of the property and G would get ER.

Example 2

Question H owns the shares in a company and also a property which is used by the company for business purposes. G sells all of his shares and the property to his son.

HMRC reply The sale of the shares IS a share purchase arrangement because the presumption is that the disposal and acquisition of the shares is done under a contract. This contract will give the son an entitlement to acquire the shares. Having an entitlement is a pre-requisite for there to be a share purchase arrangement.

Therefore the associated disposal rules would NOT apply to the disposal of the property and G would NOT get ER on the disposal of the property. G would still get ER on disposal of the shares.

Quite what the logic for this is is not clear.

Withdrawal from participation

Whilst I was asking questions, I also asked HMRC how the 5% test fitted in with Condition B and received the following statement:

'As for the 5% test and its interaction with the need for a withdrawal from participation...it remains the case that a "withdrawal from participation" does not necessarily imply a decrease in the claimant's work for the company or firm. This is because 'participation' in this context means investment or stakeholding in the nature of investment, rather than activity. There is therefore no conflict between the need for there to be at least a 5% material disposal and the possibility that there might be no reduction in the claimant's working commitment to the business.'

The way forward

Hopefully HMRC will issue some further examples on this matter but, in the meantime, beware of the small print!