In the Chancellor’s 2018 Budget, new criteria were introduced in relation to Entrepreneurs’ Relief (ER) to apply from 6 April 2019, with transitional rules applying to disposals from Budget Day (29 October 2018).
This tightening of the rules in order to qualify for this relief means that business owners should review their current arrangements if they are looking to exit from their business in the future to ensure that they will still meet all the conditions.
It is also worth noting that HMRC are scrutinising and challenging claims for ER more and more so it is essential that all matters are dealt with accurately and properly in order to secure a successful claim for relief.
ER benefits taxpayers by taxing the first £10m of gain at 10% instead of the individual’s marginal rate (10% or 20%) where an asset qualifies for ER. The £10m figure is a lifetime maximum. Items which qualify for ER include sole trader businesses, partnership shares and shareholdings in an individual’s “personal company”.
Assets used in a business or by a personal company and sold as part of the disposal of that business can qualify for ER as an “associated disposal”, though again there are criteria that need to be satisfied in order for such disposals to qualify.
To qualify as a “personal company” for ER purposes, the company must be an unquoted trading company. The individual shareholder must hold 5% or more of the ordinary share capital and voting rights in that company and also be an employee or officer.
The major changes introduced as a result of the 2018 Budget are as follows:
- The required length of time for the qualifying conditions (as set out above) to be met in order to obtain the relief was increased from 12 months to 24 months.
- Originally, a new test was introduced in order to meet the definition of “personal company”. This is that the relevant shareholder must be entitled to 5% of the company’s profits available for distribution and that the shareholder must also be entitled to 5% of the assets on a winding up. After some resistance and feedback from professional bodies and firms, an alternative test to the above was proposed and subsequently included within the 2019 Finance Act, which is that on a sale of the entire ordinary share capital of the company, the shareholder should be entitled to at least 5% of the proceeds.
The 2019 Finance Act, which received Royal Assent on 12th February 2019, introduces legislation from April 2019 which means that ER can be “banked”. From April 2019, where an existing shareholder has their holding taken below 5% as a result of a new issue of shares to other investors, then it is possible to “bank” the ER available up to that point and retain the shares (although from the point of the new share issue, ER will no longer be available on future growth).
This means that individuals such as the founders of businesses will no longer be precluded from qualifying for ER as their business grows. Previously, it would not have been possible for these individuals to claim ER if they remained involved in the business and their total shareholding dropped below 5%.
If you have any queries relating to your own business or those of your clients then please do not hesitate to contact us.