How to qualify for Entrepreneurs Relief on your investment property

Entrepreneurs Relief now lets you pay 10% tax on up to £5 million of capital gains during your lifetime. With the top capital gains tax rate now 28%, the potential saving is £900,000 per person. The relief is designed mainly for people selling businesses, in particular 'trading businesses'. A trading business is, for want of a better word, a 'regular' business, as opposed to an investment business which owns assets like rental properties. Entrepreneurs' relief is not generally available when you sell investment properties but it may be available when you sell properties used in a trading business, for example your premises. Fortunately, you may be able to convert an investment property into a trading property in certain circumstances and benefit from the 10% tax rate. Entrepreneurs' relief is generally available if you use the property in a trading business for at least a year before selling up or closing down the business (known as a cessation). In cases of cessation, the property must be sold within three years of the cessation. So the basic principle is this: set up a business for a year, use your property in the business, sell the business or close it down, claim entrepreneurs' relief on the property sale. The Structure of the Business The strategy will not work if the business you set up is a company or partnership. When you sell a property that was used by your company or partnership this is known as an associated disposal. The entrepreneurs' relief available on an associated disposal is restricted to reflect any period when the asset was not being used in a qualifying business carried on by the company or partnership. In other words, if you've owned the property for 20 years and your company uses it for one year, at best you will receive entrepreneurs' relief on just 5% of your gain. However, no such restrictions apply where the property is used by a sole trader in their own trading business, or as qualifying furnished holiday accommodation. In these cases, it appears that full entrepreneurs' relief is available: provided that the property is being used in the business when the business is sold or there is a cessation. Where the owner has an existing qualifying business, it even appears that there is no minimum period for which the property must be used in that business, provided that the owner runs the business itself for at least a year. For those without an existing qualifying business, it will be necessary to set one up and run it for at least a year in order to benefit. Example In 1982, Abdul bought a shop as an investment property for £30,000. It is now worth £330,000 and he would like to sell it. Before selling the property, however, Abdul adopts it as his own trading premises for thirteen months. He then ceases trading and sells the property, making a gain of £300,000. Because Abdul used the property in his own trade, he will be entitled to entrepreneurs' relief, reducing the capital gains tax due on his sale from £84,000 to £30,000 (ignoring the annual exemption and assuming that Abdul is a higher-rate taxpayer). The important point to note is that Abdul still gets the relief despite the fact that the entire gain arose before he adopted the property as his own trading premises! Note that Abdul would need to use the property in his own qualifying trade -- e.g. as a shop with him as sole proprietor. Using it as the office for his investment business will not suffice. He can, however, employ a manager to run the shop for him if he wishes. A similar approach might work with residential property by adopting it as a furnished holiday let for a year or more. Where the owner already has an existing furnished holiday letting business, it might even be possible for them to obtain entrepreneurs' relief on a residential investment property by letting it out as qualifying furnished holiday accommodation for a shorter period before sale. However, it is not entirely clear whether this would work when the owner does not also either sell their other furnished holiday letting properties or cease their furnished holiday letting business altogether. Whether you have commercial or residential property, to determine whether this tax saving strategy will be worthwhile, you will need to weigh up the potential tax savings against the costs (lost rental income, business rates and any other costs associated with setting up, running and then shutting down the business). In the right circumstances, however, you could save thousands in capital gains tax.