Tricks and traps of associated disposals

Examining the application of entrepreneurs’ relief to associated disposals

This relief is given to a shareholder and partner on disposal of assets held privately and used in the trade of their personal company or partnership, when qualifying conditions are met.

Associated disposals do not apply to sole traders, as there is no separation in ownership of assets between the trade and the individual carrying that trade. In these cases the asset is always deemed to be within the business.


1. Material disposal

An associated disposal must be part of a wider material disposal of a trading business where the asset was used. The definition of a material disposal of business was changed in 2015:

For associated disposals before 18 March 2015

  • All or part of the business of a partnership. Part is not defined.
  • Any stake in a personal company; there is no de-minimis for the reduction of the shareholding.

For associated disposals after 18 March 2015

  • For a partnership  minimum 5% of total partnership assets, and there must be no partnership interest repurchase arrangements in place.
  • If at the point of disposal less than 5% interest is held – disposal of the whole interest held and the individual held at least 5% interest in the partnership for at least three continuous years out of 8 years preceding disposal.
  • For a company  minimum 5% of company’s ordinary shares or securities, carrying 5% voting rights, and there must be no share purchase arrangements in place.

Partnership or share purchase arrangements are arrangements under which the seller of the asset subject to the associated disposal, or a person connected with them, is entitled to acquire a new or additional interest in the partnership or stake in the company where the asset was used or company in the same trading group.

‘Arrangements’ may include an ‘agreement, understanding, scheme, transaction or series of transactions’ whether or not legally enforceable. 

If such arrangements are in place, no ER will apply to the associated disposal. For ER to be denied as a result of such arrangements, they must be in place at the time of the material disposal or the associated disposal.

If such arrangements were made before both the material disposal and the associated disposal, and without regard to either of them, they will not affect entitlement to entrepreneurs’ relief. This means that pre-arranged family succession plans are not considered ‘arrangements’.


  1. A father sells land, used by his partnership, to his children when he retires from the partnership. Gain on the land would not qualify for ER if at the time of the sale of his partnership interest or the disposal of land, there was an understanding that the father would buy back an interest in the partnership at some point in future.  
  2. At the time of material disposal of shares in his personal company, the shareholder-director agrees to purchase the shares of another trading company in the same group or a company which is to become part of such a trading group.

A company share buy-back treated as capital distribution is not a share purchase arrangement for these purposes.

2. Withdrawal from participation in the business

The associated disposal must be made as part of a wider withdrawal of the individual from the business. The practical application of this condition created some difficulties.

The following examples have been provided by HMRC (CG63998) to illustrate circumstances when the condition is met:

  • In a father/son partnership, the father reduces his interest from 3/5 to 1/5 in favour of his son, and passes to his son premises previously owned by the father and used by the partnership. Father continues to work in the business as before. Father meets the condition of withdrawal from the participation in the business by significantly reducing his partnership interest, and therefore will qualify for entrepreneur’s relief on the sale of the premises.  
  • A sole shareholder and full time director sells her company and factory unit held by her privately and used by the company. She remains the director. She meets the condition of withdrawal from the participation in the business by selling her whole stake in the company therefore the gain on the factory unit will qualify for entrepreneur’s relief.

Whether or not a wider withdrawal from the business has taken place should be considered on all relevant facts. For example a reduction of working hours alone, without considering a wider context, is unlikely to be sufficient or conclusive.

Usually, a material disposal of business is closely linked with the withdrawal from participation in that business. The withdrawal is the consequence of the disposal and closely related to it. It is not necessary to completely withdraw from participation in the business, but the withdrawal needs to be material and significant.

Sometimes however, a material disposal of a business, including an associated disposal, will not be synonymous with a withdrawal from the participation in the business.  This may be the case when the individual continues to make or influence decisions of the business in the same way as before, or continues to be involved.

As the “material disposal” and the “associated disposal” must be part and parcel of one single event of withdrawal from participation in the business, HMRC’s expectation is that there will be no significant break between the two disposals.

However, in some circumstances, where a business ceases to trade, the “material disposal” and the “associated disposal” may not be concurrent. For example the seller may need more time to find a buyer for the asset, or enable the buyer to secure funding.

In some cases the business subject to material disposal ceases, and the asset associated is no longer used in that business at the time of associated disposal.

HMRC’s view is that entrepreneur’s relief is likely to be granted if the associated disposal is completed:

  • within one year of the cessation of a business – even if the asset is put to other use following the cessation of the business, ER will still be available on the asset, as long as it is sold within one year of cessation. 
  • within three years of the cessation of a business if the asset has not been leased or used for any other purpose at any time after the business ceased;
  • where the business has not ceased, within three years of the material disposal, provided the asset has not been used for any purpose other than that of the business.

The above timescales are not statutory provisions. A longer break between the material and associated disposals may be allowed if there is evidence that the two disposals are still part of the same event of withdrawal from the business. To the extent when cessation can be planned for, the rules create some tax planning opportunities in order to preserve ER.

3. Length of time the asset was used in the business

To qualify for entrepreneur’s relief as an associated disposal, assets must be used / owned in the business for a specific time.

If the asset was acquired before 13 June 2016

How long the asset is used is considered. How long the asset is owned vs. used, is not a qualifying condition, but may restrict relief (see “Relief restrictions” below).

  • Used for 1 year – disposal of business, with which the disposal of asset is associated, was before 6 April 2019
  • Used for 2 years – if disposal of business, with which the disposal of asset was associated, was after 6 April 2016 or business ceased on or after 29 October 2019 (date of 2018 budget)

If the asset was acquired on or after 13 June 2016

In addition to the one or two year period of use, the asset must also be owned for the period of three years, for the associated disposal to qualify for ER.

If the asset or its share is not owned for three years ending with cessation or disposal, that asset or its relevant share will not qualify for ER. This poses problems when assets held jointly are sold or gifted to remaining joint owners.


Husband, wife and their son own land in equal shares since before 13 June 2016. They provide the land free to a trading partnership carried by husband and son.

In August 2016 (after 13/06/16), the wife dies and leaves her 1/3 share of land to the son and her daughter in equal proportions.

Land and partnership is sold by joint owners on 31 July 2018. As at the date of disposal, the entitlement of partners to ER on the disposal of land is as follows:

  • Father - 1/3 share - acquired before 13/06/16Used in partnership for more than a year. ER applies in full.
  • Son:
    • 1/3 - acquired before 13/06/16Used in partnership for more than a year . ER applies in full.
    • 1/6 of land acquired after 13/06/18Used in partnership for more than a year, but owned by son for less than three years (from August 16 when he got it from mother to July 18 when the land is sold). No ER applies to this 1/6 share.

Restriction of relief

Entrepreneurs’ relief will be restricted on an associated disposal if:

  1. the asset is used in the business for only part of the ownership period
  2. the asset is only partly used in the business (i.e. private use element)
  3. the individual is not involved in the business (as a partner, officer or employee) throughout the period the asset was in business use
  4. rent is charged on the asset from 6 April 2008