Entrepreneurs' relief - material disposal detailed commentary

This page looks in more detail at the rules for material disposals
Condition A1 is that the individual (P) makes a material disposal of business assets consisting of at least a five per cent interest in the assets of a partnership, and at the date of disposal there are no arrangements (partnership purchase arrangements) under which P or a person connected with him is entitled to acquire or increase an interest in the partnership. The assets of a Scottish partnership or a partnership constituted under non-UK law where that law treats partnership assets as held by or on behalf of the partnership (rather than, for example, by the partners) are to be treated for these purposes as held by the members of the partnership in the proportions that they are entitled to profit shares

Condition A2 is that P makes a material disposal of business assets consisting of a disposal of shares and the shares disposed of constitute at least a five per cent of the company's share capital and carry at least five per cent of the voting rights in the company, and at the date of disposal there are no arrangements (share purchase arrangements) under which P or a person connected with him is entitled to acquire shares in or securities of the company (company A) or a company which is a member of a trading group of which company A is a member6. This condition is not met if the company makes a capital distribution, unless the company is being dissolved or wound up.

Condition A3 is that P makes a material disposal of business assets consisting of at least a five per cent of the value of securities in the company, and at the date of disposal there are no arrangements (share purchase arrangements) under which P or a person connected with him is entitled to acquire shares in or securities of the company (company A) or a company which is a member of a trading group of which company A is a member9.

For the purposes of conditions A2 and A3, a company is treated as being a member of a trading group of which company A is a member10 if at the time of the disposal there are arrangements which it is reasonable to assume will result in the company and company A becoming members of the same group11.

Condition B is that the disposal is made as part of a withdrawal of P from participation in the business carried on by the partnership, company, or, if the company is a member of a trading group, a group company, and at the date of disposal there are no partnership purchase or share purchase arrangements as described above

Condition C is that, throughout the period of one year ending with either the date of the material disposal of business assets, or if earlier, the cessation of the partnership or company business, the assets (or interests therein) which are disposed of are used for business purposes

Where all of the conditions are met, the disposal mentioned in condition B is the disposal associated with a relevant material disposal

So for example, if a company director who owns the premises from which the company carries on its business sells the premises at the same time as he sells all his shares in the company, the sale of the premises may be treated as an associated disposal. It should be noted that the relief is not available to trustees and does not extend to disposals associated with a material disposal by a sole trader.

HMRC consider that it is not necessary that the individual reduce the amount of work that he does for the partnership or company; only that the disposal be related to the reduction of his interest in the partnership or holding of shares in the company

Just and reasonable apportionment
The amount of the gain which is to be taken into account under s 169N(1) (see C3.1307) and therefore qualifies for entrepreneurs' relief is restricted to a just and reasonable amount22 if any of the above conditions apply. The balance of that amount remains a chargeable gain without benefiting from entrepreneurs' relief23. How much of an amount is just and reasonable is determined as follows24—

•  (a)     in the case of (i) above account is to be taken of the length of the period of business use;

•  (b)     in the case of (ii) above account is to be taken of the part of the assets used for business purposes;

•  (c)     in the case of (iii) above account is to be taken of the length of the period for which the individual was involved in the carrying on of the business;

•  (d)     in the case of (iv) above account is to be taken of the extent to which the rent paid is less than the full market rent for the assets.

Examples
For example of how these rules work in practice seeHere