Just a Little Bit Longer – New Rules on Entrepreneurs’ Relief
Entrepreneur’s relief (“ER”) is a valuable relief from Capital Gains Tax (“CGT”) which, when available, restricts the tax rate to a flat 10% on up to £10 million worth of lifetime gains.
The 2018 Budget announced changes to the conditions for obtaining ER, and in light of the new rules it may be worthwhile for taxpayers to dispose of relevant assets before 6 April 2019.
Minimum Qualifying Period
ER applies to disposals of:
- shares in a trading company;
- (the whole or part of) a business;
- assets in association with the sale of a business;
- assets from a solvent company that has ceased trading.
For disposals involving shares, the shareholder would need to work for the company and hold at least 5% of the ordinary share capital of the company.
Under the current rules, in order to obtain ER on the disposal of qualifying business assets the above conditions must have been met for period of 1 year prior to the disposal. For relevant disposals on or after 6 April 2019, this period is extended to 2 years.
Transitional rules will apply where a business ceased, or the personal company ceased to be a trading company (or the holding company of a trading group), before 29 October 2018. Where the claimant’s business ceased before 29 October 2018, the 1 year period will continue to apply to claims on disposals of assets within 3 years of cessation.
Where individuals/trusts intend to make a relevant disposal in the near future and are looking to make a claim for ER on any gains, it may be beneficial to make the disposal before 6 April 2019. To demonstrate why, consider the following example:
Mr Z has been trading as a cheesemonger under Mr Z’s Cheeze since 1 March 2018. The conditions for ER have been met since this date, and will continue to be met where Mr Z continues to trade going forward.
He has received an offer from a rival cheese trader, who is looking to purchase his business.
A) Sale of business between 1 March 2019 and 5 April 2019
Mr Z will have met the relevant conditions for ER for at least 1 year, and so relief will be available where his business is sold in this period.
B) Sale between 6 April 2019 and 29 February 2020
Mr Z will not have met the relevant conditions for ER for the new minimum period of 2 years, and therefore ER will not be available on this disposal.
C) Sale on/after 1 March 2020
Mr Z will now have met the qualifying conditions for ER for the minimum period of 2 years, and therefore relief will be available on this disposal.
In light of the above, where a taxpyaer is looking to sell their business/shares in the near future and intends to claim ER on the gain, they should consider the availability of ER where the disposal takes place on or after 6 April 2019. If they have not met the qualifying conditions for ER for at least 2 years as at 6 April 2019, it may be more tax efficient to dispose of the assets on or before 5 April 2019.
Class of Shares
In order to obtain ER on a disposal of shares in a company, the company must be the shareholder’s “personal company”.
Prior to 29 October 2018, a personal company was defined as a company in which you held at least 5% of the issued share capital and 5% of the voting rights.
Effective from 29 October 2018, two additional conditions were introduced such that the shareholder must now also be beneficially entitled to:
- 5% of the profits available for distribution (i.e. dividends) and assets available for distribution on a winding up of the company; OR
- 5% of the sale proceeds had the whole of the ordinary share capital of the company been sold on the day of disposal.
See our blog on Alphabet Shares for further details.
If you require advice on the application of ER rules and guidance in your situation, please contact us.
Update: Entrepreneurs’ Relief & Alphabet Shares (21 December 2018)
Budget 2018: Entrepreneurs’ Relief & Alphabet Shares (28 November 2018)