Entrepreneurs relief for property developers?
Entrepreneurs relief is effectively the successor to business asset taper relief and can provide for an effective tax rate of just 10% on certain qualifying disposals. Unlike taper relief though there is a lifetime limit of £10,000,000. This provides that only gains up to £10,000,000 can qualify for relief during your lifetime.
It applies to both sole traders and sales of company shares so will it apply to property developers?
In principle it could but it will only apply in certain specific circumstances.
Firstly it's important to note that it only applies for the purposes of capital gains tax - not income tax. Therefore a property developer that was conducting a trade would not be able to argue that a disposal of a property would qualify for Entrepreneurs relief (as this would be subject to income tax).
Entrepreneurs relief would in any case only usually be applicable to a sole trader where they sold an interest in their business and not just an individual asset. What if a property developer sold their entire stock of properties would this then qualify? Well no it wouldn't as this would still be subject to income tax.
If a property developer was to sell their entire business which also included some properties this could in theory qualify for Entrepreneurs relief. This would essentially be the same as a bookshop owner selling his bookshop (with the properties being stock just as books are for a bookshop). It's essential though that a business is being sold and not just a collection of assets. So you'd need to have other assets as well such as business goodwill. If this applied though the 10% CGT rate could be available on the other assets.
If you're a property investor as opposed to a property developer although you would be subject to capital gains tax and not income tax you still wouldn't qualify. In order to qualify for Entrepreneurs relief you need to sell an interest in a business. By selling an investment property you would not be selling an interest in a business and would therefore be subject to the full 28% rate of CGT without Entrepreneurs relief.
What if you use a company?
If you carry out your property development or investment activity through a company you'd need to consider whether you or the company could qualify.
A disposal by the company would never qualify for Entrepreneurs relief, and therefore it would be only share disposals that could qualify.
If the company was a property investment company there would be no Entrepreneurs relief on the shares as the company would not be a qualifying trading company.
However if the company was carrying on a trade of property development it may well qualify. Therefore the shareholders could sell the shares in the property development company and qualify for the 10% rate of CGT on the first £10,000,000 of any gain providing for the 12 months before the disposal they held more than 5% of the shares and were an officer (eg director or company secretary) or employee of the company.
This applies because a property development company would be regarded as a trading company. Note that it will only apply when the shareholders sell the shares.
You would also need to watch out for the company having any non trading assets that could result in the company's status being 'tainted'. A company that has substantial non trading assets would not qualify for Entrepreneurs relief.
Substantial in this context is treated as more than 20% of the net assets or income.
Therefore if the company had any properties that weren't held as stock but were instead held as investments this could prevent Entrepreneurs relief being claimed.
Similarly if the company had large cash balances not required for the purposes of the trade this could prevent the shareholders qualifying for Entrepreneurs relief. If you could argue that the company held the cash for future development opportunities it would then be for the purpose of the trade and may not result in the loss of Entrepreneurs relief.
Where you do qualify for Entrepreneurs relief the £10,000,000 applies for each individual shareholder. Therefore if a company is owned between a number of family members the amount of Entrepreneurs relief could be substantial more than £10,000,000.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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Disclaimer
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i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
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