The Finance Act 2015 changes limited the availability of relief on a disposal of personal assets used in a business (‘associated disposals’) when the business was sold to members of the claimant’s family under normal succession arrangements.
Clause 73 allows ER to be claimed in some circumstances where the 2015 changes prohibited it, recognising that these situations were not abusive.
The amendments will be backdated to the date on which the Finance Act 2015 measures became effective. They will therefore apply to disposals on or after 18 March 2015. (Individuals who have already submitted a tax return reflecting disposals between 18 March and 5 April 2016 will have until 31 January 2017 to submit a revised tax return claiming ER if applicable.)
Some aspects of the drafting of clause 73 are being considered by HMRC following recommendations from the stakeholder group.
Section 169K of the Taxation of Chargeable Gains Act 1992 (which this clause amends) currently requires that a claimant disposes of at least 5% of the partnership assets or 5% of the ordinary shares of a company and denies relief where arrangements exist for the acquisition of shares or increased partnership share by anyone connected with the claimant (‘P’ in the legislation). The amendments in the Bill ensure that the disposal does not have to be a minimum of 5% provided that the claimant is disposing of all of his or her residual interest in the partnership or shareholding (new Condition ZA1). This very welcome relaxation allows for a gradual withdrawal from a business (a common situation in family owned businesses) while still retaining the ability to claim the relief.
There are some aspects of the revisions that the stakeholder group consider to have a potentially adverse retroactive effect. It is understood that such an effect is not within the policy intent and that the government is considering amendments.
The concerns are detailed below:
To satisfy new Condition ZA1, the claimant must have held at least a 5% interest in the partnership assets for a continuous period of at least three years in the eight years ending with the date of the disposal and there are no partnership purchase arrangements (as defined) at the date of the disposal.
However a new condition (Condition D inserted by clause 73 (11)) requires that P has owned the asset that constitutes the associated disposal for at least three years at the date of disposal. As currently drafted, this condition applies to all associated disposals not just to those where the material disposal was of the whole of a partnership interest of less than 5% (new Condition ZA1). Applying Condition D to all associated disposals has a potentially retroactive effect on claims for ER made in respect of associated disposals made from 18 March 2015 to the date of publication of the Finance Bill as it retroactively imposes the 3-year period of ownership where no such requirement existed at the time of the disposal. The stakeholder group has therefore suggested that Condition D is amended to limit its application to Condition ZA1. The amendments deal with this issue by ensuring that the ‘3 out of 8 years rule’ only apply to disposal of sub- 5% interests that constitute the disposal of the entire interest. It therefore operates as intended. In addition Condition D (either in its current or an amended form) should apply to disposals after the Bill was published as a claimant could not have known of that new requirement prior to publication of the Bill. (Amendment applies now from 13 June 2016)
A further suggested amendment is that the amendment made to Condition A1( by clause 74(4)) which now only applies to a disposal of part of P’s interest in the business whereas it previously applied to the whole or part of P’s interest, is reversed. Where a claimant disposes of an entire interest of more than 5%, Condition A1 will not be satisfied, so he or she must satisfy Condition ZA1 instead, including the three out of eight years requirement. This is the case despite the fact that disposing of an interest of more than 5% post 18 March 2015 would have satisfied Condition A1 without the need for this further condition. The retroactive application of these amendments could now deny relief for a transaction made after 18 April 2015 based on the legislation in force. It is suggested that ‘the whole or’ is restored in section 169K(1A). (Amended – ‘the whole or’ has been restored).