ACCA TX UK Syllabus C. Chargable Gains For Individuals - Entrepreneur's relief / Business asset disposal relief - Notes 1 / 2
Entrepreneurs’ relief/Business asset disposal relief
covers the first £1,000,000 of qualifying chargeable gains that a person makes in their lifetime.
It operates by charging CGT at 10% for the disposals on which it is claimed regardless of an individual’s taxable income.
Conditions to get the relief:
The asset must have been owned for at least two years prior to the disposal.
The election for the relief must be made by the anniversary of the 31/01 following the tax year of the disposal.
Therefore, if the tax year of disposal is 24/25, then the election must be made by 31/01/27.
(It is not the 31/01 immediately after the tax year, it is the one following the tax year of the disposal.)
It must be a disposal of a qualifying asset.
Qualifying assets include:
The disposal of a whole business run by a sole trader or by partners in a partnership.
The assets must have been used in the trade to qualify for the relief.
Also, the entire business must be disposed of, if a single trading asset is disposed of, it will not qualify for the relief.
Individual business assets of the individual’s or partnership’s trading business that has now ceased.
Note the disposal of assets must take place within three years of cessation of trade.
The difference here is that the entire business is not being sold, it is being shut down.
Therefore, no trading activity will continue and this is why the assets can be disposed of within 3 years of cessation
The disposal of shares in a trading company, where the individual has 5% shareholding and is also an employee of the company, for 2 years prior to the disposal.
Entrepreneurs’ relief/Business asset disposal relief will be available on the entire disposal, regardless of whether the trading company owns assets for investment or not.
Illustration
On 14 October 2024, a shareholder of Numbers Ltd, an unquoted trading company, sold his entire shareholding in the company.
He had been the advertising director of Numbers Ltd since the company’s incorporation on 1 December 2023.
He had 40% shares in the company since its incorporation on 1 December 2023.
Will this disposal qualify for entrepreneurs’ relief/business asset disposal relief?
Solution
This disposal will not qualify for entrepreneurs’ relief/business asset disposal relief because:
The shares were owned for less than two years.
Illustration:
Sunder disposed of his business to an unconnected person. The business he had the following asset values:
Goodwill £150,000
Freehold office £200,000
Inventory stock £20,000
Debtors £30,000
Investment property £100,000
Cash £50,000
Which of the assets will qualify for entrepreneur’s relief/business asset disposal relief on disposal of the entire business?
Solution:
The investment property does not qualify for entrepreneur's relief/business asset disposal relief as only assets that are used in the trade can qualify.
An investment property is just held for investment, not used in the trade.
| Asset | Market Values | Capital gains tax treatment |
|---|---|---|
| Goodwill | £150,000 | Entrepreneurs’ relief/Business asset disposal relief available. Taxed at 10% |
| Freehold office | £200,000 | Entrepreneurs’ relief/Business asset disposal relief available. Taxed at 10% |
| Inventory stock | £20,000 | Exempt |
| Debtors | £30,000 | Exempt |
| Cash | £50,000 | Exempt |
| Investment property | £100,000 | Taxed normally at 10% or 20%. |
Illustration:
In March 2025, Sunder also disposed of a 20% shareholding in Cow Ltd.
He had been an employee of Cow Ltd. since January 2023, when he acquired the shares.
The gain arising on disposal was £200,000.
Will this gain be eligible for entrepreneurs’ relief/business asset disposal relief?
Solution:
Yes it will be.
This is because he has owned the shares and worked in the company for more than two years.
Illustration
On 30 October 2024, Bhumi sold a business that she had run as a sole trader since 1 February 2017 to an unconnected person. The disposal resulted in the following chargeable gains:
| £ | |
|---|---|
| Goodwill | 150,000 |
| Freehold office building | 400,000 |
| Freehold warehouse | 180,000 |
| 730,000 |
The warehouse had never been used by Bhumi for business purposes.
Bhumi has taxable income of £6,000 for the tax year 2024-25.
She has unused capital losses of £30,000 brought forward from the tax year 2023-24.
What is Bhumi's capital gains tax liability for the year?
Solution
| Gains qualifying for entrepreneurs’ relief/business asset disposal relief | £ |
|---|---|
| Goodwill | 150,000 |
| Freehold office building | 400,000 |
| 550,000 | |
| Other gains | |
| Freehold warehouse | 180,000 |
| Annual exempt amount | (3,000) |
| 177,000 | |
| Capital losses brought forward | (30,000) |
| 147,000 | |
| Capital gains tax: 550,000 at 10% | 55,000 |
| 147,000 at 20% | 29,400 |
| Tax liability | 84,400 |
Explanation
The capital losses and the annual exemption are set against the gains that do not qualify for entrepreneur’s relief/business asset disposal relief.
This is because it saves more tax to set the losses and exemptions against gains that are taxed at a higher rate of 20%.
£31,700 (37,700 – 6,000) of Bhumi's basic rate tax band is unused, but this remaining band limit is first set against the gains qualifying for entrepreneurs’ relief/business asset disposal relief of £550,000 even though this has no effect on the 10% tax rate.
If there is any basic rate band remaining, then it will be used for gains that do not qualify for entrepreneurs’ relief/business asset disposal relief.
Things to note:
a) Gains that qualify for entrepreneurs’ relief/business asset disposal relief will take priority in using up the basic rate band limit first.
Therefore, it is likely that other capital gains will normally fall into the higher band and pay CGT at 20%.
b) The annual exemption and relief for losses is not automatically given to the gains which qualify for entrepreneur’s relief/business asset disposal relief.
Therefore 2 separate calculations should be made and gains which do not qualify should be given the annual exemption and losses carried forward first, in order to save CGT at a higher rate.
Note: From 6 April 2019, where an unincorporated business has been sold to a company wholly or partly in exchange for shares, and incorporation relief has been applied, the period when the individual owned the unincorporated business now counts towards the qualifying two year period.