Associated disposal

associated disposals
This section deals with associated disposals made after ''' 18 March 2015. '''

For disposals before that date see Associated disposals pre 18 March 2015

A disposal can be treated as associated with the material disposal if it takes place:

·       within one year of the cessation of a business

·       within three years of the cessation of a business if the asset has not been leased or used for any other purpose at any time after the business ceased; or

·       where the business has not ceased, within three years of the material disposal provided the asset has not been used for any purpose other than that of the business

These rules do not apply to isolated disposals of assets.

Restriction of relief
Entrepreneurs’ relief will be restricted on an associated disposal if:

·       the asset is used in the business for only part of the ownership period

·       the asset is only partly used in the business (ie private use element

) ·       the individual is not involved in the business throughout the period

·       the asset was rented to the business (any amount of rent causes a restriction, it is not just where rent over market value is paid), but the period before 6 April 2008 is ignored TCGA 1992, s 169P.

For a more detailed discussion of what constitutes rent see here

If the disposal is not a material disposal, the receipt of rent may: ·

•disqualify the disposal from being an associated disposal through TCGA 1992, s 169K(2)(3), or ·

•result in an apportionment under TCGA 1992, s 169P(4)(d)

The business must have been owned by the disposing taxpayer throughout the year prior to disposal. Likewise business assets must have been in use by the business at the date of cessation, and the business must have been owned by the vendor for the year prior to cessation.

Disposals made after material disposals
A disposal made after a material disposal of business assets can qualify for entrepreneurs’ relief if it is ‘associated’ with that material disposal.

A disposal is ‘associated’ where conditions A1, A2 or A3 and B and C are met. The individual makes a material disposal of business assets which consist of the disposal of:

·       (A1) the whole or part of his interest in a partnership –  see here and the disposed interest is at least a 5% interest in the partnership’s assets;

·       (A2) shares, all or some of which are ordinary shares, and the ordinary shares disposed constitute at least 5% of the ordinary share capital, and carry at least 5% of the voting rights; or

·       (A3) securities, and those disposed constitute at least 5% of the value of the securities of the company, and

·       (B) the disposal is made as part of the withdrawal of participation in the business, and

·       (C) the asset had been used in the business throughout the period of one year ending with either the disposal or the cessation of the partnership or company For a more detailed discussion of these rules see Here

For the application of the Associated disposal rules for sole traders see Associated disposals - sole traders

Where at the time of the disposal in A1, A2 or A3 or at the time of the actual associated disposal arrangements exist which entitle an individual to acquire further shares or securities in the company (or group member) or increase a partnership interest or share, the conditions will not be satisfied.

This will also be the case where a material disposal of shares is undertaken by virtue of a capital distribution other than in the course of dissolving or winding up a company.

TCGA 1992, s122

It is important to realise that the 5% requirement is 5% of the total business, not 5% of the individual's total interest/holding. For more details, see Simon's Taxes C3.1305 (subscription sensitive). TCGA 1992, s 169K(1)-(1E)

HMRC confirm that ‘withdrawal’ from the business relates to the ownership of the business. The individual can continue to work full-time for the business as long as his interest in the ownership has significantly reduced. However, the associated disposal and the material disposal must be linked in that these disposals together constitute part of the process of withdrawal from participation in the business. As highlighted above from 18 March 2015 the material disposal must constitute at least 5% of the shares, securities or interest in a partnership so that there can be an associated disposal. CG63995

HMRC’s view is that there should not be a significant interval between the material disposal and associated disposal as they must be 'part and parcel' of the same event even if the associated disposal is made later. Professional bodies' report Example C1 (paras 56-59 ).

Although this is non-statutory guidance, in all likelihood if you submit a claim for entrepreneurs' relief on an associated disposal which falls outside of these time periods, HMRC will enquire into the transaction and argue that it is not an associated disposal.

Disposal of business assets after cessation
Following the sale or cessation of the business, there might be retained assets which were used in the business which can then be sold. These will attract entrepreneurs' relief if they are sold within three years. This is true even where retained premises are let out. The business must have been owned by the disposing taxpayer throughout the year prior to disposal. Likewise business assets must have been in use by the business at the date of cessation, and the business must have been owned by the vendor for the year prior to cessation.