Entrepreneurs’ Relief – beware of changes

1st July 2019 by Carl Page

The Entrepreneurs’ Relief (“ER”) legislation has been in place since 2008, and where the criteria is met, means that you will pay tax at the lower rate of 10% on all capital gains on qualifying assets on the sale of your business, or shares in a trading company.

Slightly unexpectedly, the 2018 Budget announced subtle changes to the ER legislation which may have a significant impact.

Firstly, the qualifying period is increased from one year to two years for disposals taking place on or after 6 April 2019.  Consequently, where an individual shareholder is potentially unable to obtain ER on a disposal, any corrective action now needs to be in place for double the period of time in order for relief to be available on the eventual sale.  Whilst a one-year delay to a sale may be acceptable in certain circumstances, it is likely that a two-year delay to accommodate a vendor will be considerably less welcome.

Secondly, for disposals on or after 29 October 2018, two new tests have been added to the definition of a “personal company” requiring the claimant to have a 5% interest in both the distributable profits and the net assets of the company.

In summary the qualifying criteria is now as follows:

Sale of business

To qualify for the relief both of the following must apply:

• You are a sole trader or business partner
• You have owned the business for at least two years before the date you sell it

The same conditions apply if you are simply ceasing your business, but you must dispose of the business assets within three years to qualify for the relief.

Selling shares

Where shares in a trading company, or the holding company of a trading group, are sold, the legislation requires the following conditions to be met in the two-year period up to the sale for the relief to be available: -

a) The shareholder must have been an employee or a director of the company;
b) They must have held at least 5% of the ordinary share capital, and this holding of ordinary share capital should have entitled them to exercise at least 5% of the voting rights.
c) The individual must be entitled to at least 5% of the profits available for distribution to the company’s equity holders and assets available for distribution to its equity holders in a winding up; or,
d) In the event of a disposal of the ordinary share capital of the company, the individual would be entitled to at least 5% of the disposal proceeds.

If the company ceases to be a trading company, relief will still apply if you sell your shares within three years.

There was however a welcome change introduced in the budget which allows ER to, in effect be “banked”, where, due to an issue of shares by a company on or after 6 April 2019 to obtain a cash investment, an individual’s shareholding is diluted so that the minimum 5% tests as set out above are no longer met post investment.  In order to obtain this relief, it is necessary for the individual to make certain formal elections which should not be overlooked.

The net effect of the above changes has been to increase the complexity of the ER legislation.  The availability of the relief should not be assumed and should be reviewed before any business or share sale is entered into


Author

Carl Page

Carl Page

Partner
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