New entrepreneurs’ relief rules – a goodwill gesture

You’re planning to transfer your business to a company. You know that in 2014 some of the tax advantages for this were blocked by anti-avoidance rules, but a colleague says these were reversed in the 2016 Budget. Is he correct?

The ER tax break

Until late 2014 sole traders and partnerships were actively encouraged by their accountants to take advantage of the tax breaks offered by transferring their business to a company. Chief among these was a one-off chance for an established business to extract a low-tax-cost lump sum in the process. This was achieved using capital gains tax (CGT) entrepreneurs’ relief (ER).

Example: Jane ran a garden design business, Jay Gardens, which she started from scratch as a sole trader. In 2013, after several years’ trading, her accountant advised Jane that she could transfer the business to a new company (which she would own), to save tax. As part of the arrangement the goodwill linked to Jay Garden’s reputation, valued at £200,000, was sold to JG Ltd. The company paid Jane for the goodwill. Because the goodwill was a business asset ER applied meaning that Jane only paid CGT at 10% on the money paid to her by her company.

End of the tax break

The government put an end to the goodwill/ER tax break by introducing anti-avoidance rules on 3 December 2014. It meant that when business owners transferred goodwill to a company in which they owned or controlled shares, directly or indirectly, ER didn’t apply. However, the rules had some unintended side effects.

Family takeovers

Because the anti-avoidance rules weren’t thought through properly it meant that a business sold to members of the owner’s family, rather than an independent buyer, would lose out on ER in respect of money they received for goodwill. In March 2016 HMRC announced changes to the anti-avoidance rules to resolve the original mistakes. In fact, the changes go a little further, they backdate the corrections.
Tip: If you transferred a business to a company since 3 December 2014 and received payment for goodwill, which produced a capital gain, and the following conditions apply, you can claim ER against it. This can be done by amending your 2014/15 (or 2015/16) tax return.

Conditions

You can claim ER against gains made from the sale of goodwill where:

• neither you nor a company you’re connected with, own 5% or more of the ordinary share capital in the company you sold the goodwill to
• neither you nor a company you’re connected with, control 5% or more of the voting rights in the company you sold the goodwill to.

That means a family company, to which the above conditions apply, can take over your business and pay you for goodwill and any resulting gain qualifies for ER.

A related ER tax break

ER was also blocked by the 2014 anti-avoidance rules in respect of a capital gain you made from selling to a member of your family a personally owned asset, e.g. trading premises, which you used in your partnership or company. This restriction has also been reversed and the change backdated to 3 December 2014.

Your colleague is correct. What’s more, the changes are backdated to 3 December 2014 when the anti-avoidance rules were introduced. You can therefore claim entrepreneurs’ relief where you make a gain from selling goodwill to a company as long as you don’t own or control 5% or more of its ordinary share capital.