Entrepreneurs’ relief (ER) provides a reduced rate of capital gains tax of 10% on the disposal of certain business assets, where specific conditions can be met. With such a beneficial relief, a business owner’s tax liability can effectively be reduced by up to 50% on disposal.
The 2018 Budget, however, announced an unexpected and immediate change to the qualifying conditions to be satisfied to claim ER on the disposal of shares in a ‘personal company’ . There was no consultation on the proposed changes and the rules, as originally drafted, were set to deny relief for a number of commercial arrangements including companies with multiple classes of shares, growth shares and/or non-commercial debt. Following representation, however, a last minute amendment to the legislation was made which has largely alleviated this concern.
Prior to 29 October 2018, all of the following conditions must have been met by the seller to qualify for ER for at least one year prior to a share disposal:
- own at least 5% of the ordinary share capital;
- hold at least 5% of the voting rights in the company; and
- be an officer or employee of the company or another company in the group.
In addition to the above, for disposals made on or after 29 October 2018, the seller must now also meet one of the following two tests:
- be beneficially entitled to at least 5% of the profits available for distribution and 5% of the assets available on a winding up of the company throughout the qualifying period; or
- be beneficially entitled to at least 5% of the proceeds on disposal throughout the qualifying period.
The first to the above two tests was originally introduced as a standalone condition to be satisfied. However, Hazlewoods, along with other professional firms and bodies, made representations to the government to highlight that this condition was far wider reaching than originally intended. For example, a company with more than one class of share (commonly known as alphabet shares) where an individual did not have a guaranteed entitlement to at least 5% of any dividends paid, would no longer have been eligible to claim ER. The second condition now introduced, however, should help address this issue, providing that it can be shown that the individual would be beneficially entitled to 5% of the proceeds on an assumed sale of the whole company when applying the market value at the date of disposal throughout the qualifying period.
In addition to the above, for any disposals made on or after 6 April 2019, the minimum holding period to qualify for ER will be increased from one year to two years.
The good news is that for now, ER is here to stay. Despite annual rumours around Budget time that ER might be taken away, the Chancellor confirmed in his Budget speech that the government is committed to supporting entrepreneurs. Hopefully next time they decide to tweak the rules, they may think to consult on it first!