Entrepreneurs relief is a widely claimed relief which can reduce the capital gains tax rate for individuals to 10%, on gains of up to £10 million during their lifetime. In the past 18 months the relief has undergone a number of significant changes. This may affect its availability to a number of UK business owners and shareholders.

General Conditions

In general Entrepreneurs relief applies to ‘qualifying business disposals’ which briefly fall into three categories:

1) A material disposal of business assets e.g. the disposal of all or part of a business asset
2) A disposal of trust business assets where there is a qualifying beneficiary of the trust
3) A disposal associated with a relevant material disposal.

For this relief a material disposal of business assets is either a disposal of:

a) The whole or part of a business
b) Assets that were in use for the business when the business ceased
c) Shares or securities in an individual’s personal company, where the company is a qualifying trading company.

The legislation outlining the specific details of entrepreneur’s relief has not been covered in this article. What we have summarised below are the main changes that have come in over the past 18 months.

Ownership period

With effect from April 2019 changes have been made to the time period, through which the qualifying conditions for entrepreneur’s relief must be met. Regarding the disposal of shares, the company must be a qualifying trading company. It must also be the individual’s personal company and they must be an officer or employee of the company, for a period of two years prior to the date of disposal. Before the change the holding period was just a year, meaning that a higher rate of tax may be paid on disposals after 6 April 2019 when the two year period has not been met.

This two year rule also applies to the disposal of assets used in the business when a business ceases or an ‘associated disposal’. The assets disposed of must be in use for a period of two years up to the earlier of the date of the material disposal or the date of cessation.

Personal Company Test

The definition of a personal Company has recently been changed. Previously a personal company was one where the individual held at least 5% of the ordinary share capital and voting rights of the Company. To qualify for relief a shareholder must now also meet one or both the following requirements:

a) They must be beneficially entitled to at least 5% of the profits available for distribution to equity holders and, on winding up, would be beneficially entitled to at least 5% of the assets available. This came into effect for disposals after 29 October 2018.

b) Where the whole of the ordinary share capital is disposed, the individual must be beneficially entitled to at least 5% of the proceeds. This is effective from 21 December 2018.

This change is to ensure that the relief is only claimed by those shareholders with a true material stake in a Company. With the increased complexity in the rules, it is important that Companies and their advisors continually monitor their position to ensure the relief applies.

Dilution Test

The one recent change in favour of taxpayers is where an individual’s shareholding is diluted below the 5% threshold, due to a new issue of shares. Where the new issue of shares is for cash and genuine commercial reasons, the existing shareholders are now able to obtain entrepreneurs relief on the shares up to the date of change. This is effective for relevant share issues taking place on or after 5 April 2019.

If an individual wishes to make the election, the company must cease to be the individual’s personal company as a result of the relevant share issue. Secondly the individual must fulfil all entrepreneurs relief conditions immediately before the share issue.

In addition, the individual may elect that no chargeable gain or allowable loss is to be treated as accruing on the date of the notional disposal. Instead the notional disposal is treated as accruing on the date of any subsequent disposal. This only applies if all other entrepreneurs’ relief conditions continue to be met after the notional disposal. Any uplift in the shares after this date will be taxable without entrepreneurs relief.

This change is aimed at encouraging minority shareholders who may otherwise obstruct future investment opportunities. However, it must be carefully considered where there is a chance that the shares may reduce in value, as the reduction in value may offset the entrepreneur’s relief forgone.

If you are thinking of selling your business and would like more information on how these changes may affect you, please contact one of our tax team in our Swansea office for further advice.

Tags: UK200

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