Entrepreneurs' relief just and reasonable apportionment examples



Example

On 5 April 2015 M leaves the partnership of which he has been a member for 12 years and sells his one-third partnership interest to the remaining two partners, making a gain of £250,000. Throughout that 12 years, M has personally owned the premises from which the firm has traded. For the last nine of those years (since 6 April 2006), the partnership paid M a full market rent for the use of the premises. At the time he leaves the business he also sells the premises to the remaining partners, making an “associated” gain of £100,000. He claims entrepreneurs' relief – all the conditions are met and there has been no previous claim.

•	  –     If no adjustment was made in respect of the rent, relief would be due on both gains totalling £350,000. The gains (subject to any annual exemption) would be taxed at the entrepreneurs' relief rate of 10 per cent.

•	  –     However, because for nine of the total 12 years he was a partner a full market rent was paid to M for the business use of the premises, a proportion of the gain relating to the premises will not attract relief. The entire period that M has owned and used the asset is taken into account, but only rent which was paid on or after 6 April 2008 can be taken into account. This would be seven of the 12 years the property was in use for the business. A “just and reasonable” amount in these circumstances would be—

Qualifying for relief

Total gain on sale of property	£100,000

Just and reasonable apportionment of the gain accruing from 6 April 2003 to 5 April 2008: £100,000 × 5/12	£41,667	£41,667

Just and reasonable apportionment of the gain accruing for 7 years of use from 6 April 2008 to 5 April 2015: £100,000 × 7/12	£58,333	Nil

Gain on premises attracting entrepreneurs' relief	 	£41,667

Gain on disposal of partnership interest	 	£250,000

Total gain attracting entrepreneurs' relief and (subject to any annual exemption) taxable @ 10%	 	£291,667

•

–     If however the rent paid by the partnership to M for the use of the premises was only two-thirds of a full market rent the “just and reasonable” amount must take this into account—

Qualifying for relief

Total gain on sale of premises	£100,000

Just and reasonable apportionment of the gain accruing for 5 years of use from 6 April 2003 to 5 April 2008: (£100,000 × 5/12)	£41,667	£41,667

Just and reasonable apportionment of the gain accruing for 7 years of use from 6 April 2008 to 5 April 2015: (£100,000 × 7/12 (one third qualifies for relief))	£58,333	£19,444

Gain on premises attracting entrepreneurs' relief	 	£61,111

Gain on disposal of partnership interest	 	£250,000

Total gain attracting entrepreneurs' relief and (subject to any annual exemption) taxable @ 10%	 	£311,111