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Further tightening of entrepreneurs' relief rules

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5 October 2015
As covered in our last edition of Talking Tax, the December 2014 Autumn Statement included the unexpected announcement that the disposal of goodwill to a close company related to the vendor would no longer qualify for capital gains tax entrepreneurs’ relief.
Two further measures were announced in the March Budget, effective immediately, to further restrict the availability of entrepreneurs’ relief on disposals of business assets. These changes will have the effect of increasing the tax payable on certain disposals from 10% to the main rate of 28%.

Assets held outside of the business

The first measure tightened the rules on claims to entrepreneurs’ relief in respect of disposals of assets, held personally by an individual, but used in the trade of their partnership or company. Subject to certain conditions, it is possible to claim the 10% entrepreneurs’ relief rate of tax on such disposals, where they are associated with a full or partial withdrawal from the business itself. Withdrawal from the business was not previously defined, leaving open the possibility of a claim to entrepreneurs’ relief on asset disposals at the same time as a very small reduction to an individual’s shareholding or partnership share.

To ensure that entrepreneurs’ relief is only available where an individual has genuinely withdrawn from a business, it is now only available on disposals of personally held assets where they accompany a disposal of at least a 5% shareholding in a company or at least a 5% share in the assets of a partnership.

As the rules have started to bed in we have found that this change could adversely impact some genuine commercial deals. Anti-avoidance rules have also been introduced alongside the change such that there can be no arrangements for the purchase of connected shares following the disposal. Therefore, if shares are issued by an unconnected purchaser to the vendor as part of a commercial deal they would be within the new rules.

In the example above, the sale of the shares themselves would still be eligible for entrepreneurs’ relief, but if any disposals of assets such as a property held outside of the company or partnership are planned at the same time, relief may not be available.

Although HMRC have confirmed that the rules had not been drafted to catch such commercial transactions, the rules as they stand are unchanged. There may, however, be ways to plan around these unintended consequences and we can provide further advice on this if you think you could be affected.

Joint ventures and corporate partners

The second measure aims to restrict entrepreneurs’ relief to those with a genuine
stake in a trading business and prevents claims to the relief in respect of gains on shares in certain companies which invest in joint venture companies, or which are members of partnerships. In these circumstances, relief will be denied.

For example, a corporate partner with no other trading activities will no longer qualify for entrepreneurs’ relief on a share disposal. However if, for example, the corporate partner also carried out trading activities of its own, such as a company providing the services of employees, it may potentially qualify. The rules are complex though and a number of conditions would first need to be satisfied.

For the avoidance of doubt, shares in normal trading companies or the holding companies of genuine trading groups should not be affected.

What next?

It is becoming very apparent that entrepreneurs’ relief has been and will continue to be, looked at by HMRC. Their aim is to restrict this valuable relief to those with genuine trading links, however, some simple commercial transactions may also be inadvertently caught.

Time will tell if any changes are made or new restrictions announced. In the meantime if you are looking to sell a business or assets associated with it, we would recommend that the tax implications are considered early on.