Has the House of Commons been using a time-machine? By the time you read this MPs will have considered, and probably voted through, all 127 clauses and 21 schedules of Finance Bill 2015. We are stepping into our own time-machine today, to look at a tax change which has been back-dated to 3 December 2014, and some of the changes which come into effect on 1 April and 6 April 2015.
In our newsletter on 11 December 2014 we explained the block on using entrepreneurs’ relief for gains arising on the transfer of goodwill on incorporation. However, it appears the draft law (which is effective for transfers on and after 3 December 2014), would catch more transactions than the Government intended it to.
Entrepreneurs’ relief is in many ways the replacement for retirement relief, which applied from 1965 to the start of taper relief in 1998. The tax cases which considered whether retirement relief applied to the disposal of “part of a business” are equally relevant for entrepreneurs’ relief, (see CG64035). Thus when partners retire from a partnership, they should expect to take advantage of entrepreneurs’ relief on the transfer of their share of the partnership assets, including goodwill, to the remaining partners, as that is what the relief was intended for.
However, where a partner (P) leaves the partnership and the remaining partners decide to incorporate the business, the gain on P’s share of the partnership goodwill would be blocked from benefiting from entrepreneurs’ relief. This is because P is a related party to the remaining partners and to the close company that carries on the partnership business after incorporation. Even if there is some delay between P’s retirement and the incorporation, this would not prevent the block on the relief due to the anti-avoidance provisions.
The Government has solved this problem by including a new condition in TCGA 1992, s 169LA that introduces the block on entrepreneurs’ relief on the transfer of goodwill, such that the restriction won’t apply if P is a retiring partner. However, to fit the profile of a “retiring partner” P must not:
- hold or acquire a shareholding in the close company(C ) that carries on the business transferred from the partnership, or in a company that controls C or has a major interest in C; or
- be associated to the remaining partners who become shareholders in C other than as a partner.
This second condition could still restrict the relief for family partnerships where the older generation retires and the remaining younger generation incorporate the business. Our capital gains tax experts can help you decide whether your clients can still claim entrepreneurs’ relief on retirement or not.
This is an
extract from last week’s tax tips newsletter, dated 26 March 2015. The newsletter
itself contained links to related source material for this story and the
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