Entrepreneurs’ relief (ER) was introduced in 2008 and allows individuals to benefit from a 10% rate of capital gains tax (CGT) on the disposal of certain business assets. It has proved to be a very generous and popular relief, perhaps too popular, as the rules have been significantly tightened in recent years.
Amongst a raft of changes was the announcement that from 3 December 2014 the disposal of goodwill to a connected company would no longer qualify for ER, effectively ending the possibility of claiming it, in respect of goodwill on business incorporations.
The March 2015 Budget restricted ER in respect of ‘associated disposals’ of privately held assets used in a business to those accompanied by a disposal of at least a 5% shareholding or 5% partnership share.
Changes were also brought in that effectively removed the availability of ER on the disposal of shares in joint venture companies and corporate partners.
There has been much criticism of these legislative tweaks due to their impact on genuine commercial transactions. Anti avoidance provisions designed to stop people circumventing the new rules have meant that disposals of goodwill to a third party, where the consideration includes even a very small stake in the acquiring entity, have been problematic, as have disposals of privately held business assets where the accompanying business disposal is to family members.
In response to this criticism, the Chancellor has tweaked the rules again, recognising that this is necessary to reverse what were essentially unintended consequences of the original provisions; the changes will be backdated.
Backdated to 3 December 2014:
It will be possible to claim ER on the disposal of goodwill to a close company (broadly one controlled by five or fewer) where the claimant holds or acquires shares in the acquiring company, as long as that shareholding is less than 5%. This opens up the possibility of disposing an unincorporated business to a third party, receiving both cash and a small amount of equity as consideration and still claiming ER.
A further welcome measure is the decision to allow ER on incorporation where this is undertaken as part of arrangements for the sale of the business to an independent owner.
Backdated to 18 March 2015:
The anti avoidance provisions are to be amended so that ER should now be available on the ‘associated disposal’ of a privately held business asset when the accompanying disposal of shares or partnership interest is to a family member.
Another positive announcement, for family businesses in particular, was that the 5% minimum disposal requirement will be relaxed for ‘associated disposals’ where the claimant disposes of the whole of their interest and has previously held a larger stake.
The rules on ER for joint venture companies and corporate partners have also been softened. Legislation is to be introduced so that a company which holds shares in a trading company will be treated as carrying on a proportion of the activities of that company, corresponding to its fractional shareholding in it. So an individual who has an indirect holding of at least 5% in the joint venture company and effectively controls at least 5% of the voting rights may potentially qualify for ER.
For corporate partners, the rules will apply if the individual making the disposal is entitled to at least 5% of the partnership’s assets and profits and controls at least 5% of the voting rights in the corporate partner.
The full effect of these measures won’t be known until the draft legislation is released, but they open up the possibility of a claim to ER for a range of commercial transactions where it was previously unavailable.