05 February 2019
Changes to Entrepreneurs’ Relief
Entrepreneurs' Relief ("ER") is a valuable relief from capital gains tax for individuals (and some trustees) who sell their business. ER is available on qualifying gains of up to a lifetime cumulative limit of £10 million and acts to reduce the rate of capital gains tax from 20% to 10%, which can lead to tax savings of up to £1 million.
Broadly speaking, for an individual to be eligible for ER they currently must meet the following criteria throughout the one year period prior to the disposal:
- the company must be their personal company;
- the company must be a trading company; and
- they must be an officer or employee of that company.
A company will be their personal company if:
- they hold at least 5% of the ordinary share capital; and
- they have at least 5% of the voting rights in the company.
In the Autumn 2018 Budget two further conditions were added, namely that the individual must be beneficially entitled to:
- at least 5% of the company's distributable profits; and
- at least 5% of the company's assets available for distribution on a winding up.
Changes to definition of a personal company
There has been considerable uncertainty surrounding how these two new conditions applied.
To help clarify the position, the revised Finance Bill, published in January, introduced an alternative financial test. This will enable individuals to qualify if, instead of satisfying the two new conditions, they would be beneficially entitled to at least 5% of the sale proceeds if the whole of the ordinary share capital of the company were sold.
This alternative test aims to be a simpler way of determining whether an individual is eligible for ER, and is intended to allow more complex share capital arrangements to be taken into account.
Change to minimum qualifying period
Another important change that has been introduced is that the period throughout which the eligibility criteria must be met has been changed from 1 year to 2 years.
Both of the above changes will be effective for disposals on or after 6 April 2019.
This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.
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