You can claim ER (which reduces the rate of capital gains tax you pay on the first £10 million of gains you make in your lifetime to 10%) for disposals of any of the following:
- all or part of a trading business;
- the assets of a trading business after it has stopped trading; and/or
- shares in a trading company (or holding company of a trading group).
You can claim relief on proceeds from a partial or full sale of a business, shares in a company, or on the value of any business assets remaining after the company has ceased trading.
The relief is available for you as an individual if you:
- are in business, for example as a sole trader or as a partner in a trading business; or
- hold shares in your personal trading company (or holding company of a trading group).
In order to claim ER several conditions must be met:
1. You must have owned the business (or the shares) for 12 months before claiming the relief, or for 12 months before the date the business stopped trading.
2. It is essential that the business must be a trade and the activities must not include any non-trading activities that are substantial. The word “substantial” is not defined but HMRC accept that non-trading activities that make up no more than 20% of a business will not debar a claim for ER. When considering this test surplus cash can present problems. Cash that is not required as working capital or earmarked for capital expenditure or future business investment, may risk loss of ER as a substantial non-business asset. If you are building up cash reserves for a major purpose keep records of meetings and research done into possible acquisitions to prove that the money is retained for business purposes. This test must be passed throughout the 12 months before you want to claim ER.
3. If claiming ER on shares, a shareholder can qualify for ER as long as the company is their personal company. This means that for at least a year ending with the date of the disposal, the shareholder has been a director or employee, and has owned at least 5% of the ordinary share capital carrying at least 5% of the voting rights. Once the 5%test is passed other shares such as preference shares and certain types of loan note (non-qualifying corporate bonds) can also qualify for ER.
4. If claiming ER on shares it is important to remain an employee or an officer until the date the shares are sold. Therefore, if contemplating withdrawing from a business any resignation should not become effective before the contract for sale of the shares has become unconditional. Similarly, a non-employee shareholder (e.g. a spouse who owns shares but is not an employee) who meets the 5% test can qualify for ER by making them an employee or office holder (usually company secretary). There is no minimum working time condition, so long as the employment or office genuinely exists.