On 1 April 2011 you leave the partnership of which you have been a member for several years and transfer your 1/3 interest in the partnership’s assets to the remaining two partners. You make gains of £2,250,000 on your share of the business goodwill.
You also personally owned the premises from which the firm has traded for the 13 years you had owned it. Throughout that period the partnership paid you a full market rent for the use of these premises. When you left the firm you disposed of the premises to the remaining partners making a gain on the ‘associated disposal’ of £1,300,000.
All of your gains on the disposal of your interest in the partnership’s assets – £2,250,000 on the goodwill and £1,300,000 on the associated disposal of the premises – qualify for relief.
However, because you owned the premises personally while you were a partner, and a full market rent was paid to you for the business use of the property, a proportion of the gain relating to the premises will not attract relief.
Only the period for which rent was paid after 5 April 2008 is taken into account in restricting the amount of the £1,300,000 gain which qualifies for relief. This would be 3 of the 13 years the property was in use for the business.
A ‘just and reasonable’ figure in these circumstances would be.
Total gain on the sale of the premises £1,300,000
Gain accruing for 10 years of use from 6 April 1998 to 5 April 2008 £1,300,000 x 10/13 £1,000,000 £1,000,000.
Gain accruing for three years of use from 6 April 2008 to 5 April 2011 £1,300,000 x 3/13 £300,000.
Gain on premises attracting Entrepreneurs’ Relief £1,000,000 plus gains on disposal of interests in partnership assets £2,250,000.
Total gains attracting Entrepreneurs’ Relief £3,250,000
The gain not attracting relief will therefore be £300,000 (£3,550,000 minus £3,250,000).
If the rent paid by the partnership to you for the use of the premises was less than a full market rent then the adjustment to the gain accruing after 5 April 2008 must take this into account, allowing a higher proportion of the gain to qualify for relief.
It is important to take advice with regard to the timing of any disposals and in particular if you have what is regarded as an associated business.