The end of Entrepreneurs’ Relief?
28 January 2020
Ahead of the Budget on 11 March 2020, speculation is mounting that the Government will follow through on their manifesto promise to “review and reform Entrepreneurs’ Relief”. So, what might change? More importantly, what can business sellers do to “lock in” the 10% tax rate before then?
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief provides for a reduced (10%) rate of Capital Gains Tax due on any capital gains arising on the sale of a business, or a stake in a business, provided that certain conditions are met. The relief is available to individuals on up to £10million of qualifying gains over their lifetime. It may apply to the sale of:
- shares in a trading company;
- the whole or part of a business;
- assets in use on the cessation of a business;
- as well as sales of personal assets associated with any of the above.
What are the conditions for the sale of shares?
On a disposal of shares or securities of a trading company, or the holding company of a trading group, under current rules it should – in most situations – qualify for Entrepreneurs’ Relief if:
(1) the shares have been held throughout a period of at least two years;
(2) the individual selling the shares holds at least 5% of the company’s ordinary share capital, at least 5% of voting rights and is beneficially entitled to either:
- at least 5% of distributable profits and 5% of the company’s assets available for distribution on a winding-up; or
- 5% of the proceeds if the whole of the ordinary share capital of the company were sold for market value.
(3) the individual is an officer or employee of the company or one of the companies in the same trading group.
What might change?
The Government may want to reduce the generosity of the relief (either by increasing the tax rate or reducing the lifetime limit). Alternatively, the qualifying conditions may be tightened to reduce the range of assets that could qualify for the relief, or increasing the ownership requirement necessary to qualify. There is even some speculation that Entrepreneurs’ Relief could be abolished altogether, although this would seem an extreme change to make without an initial consultation on a replacement.
When could this happen?
The 2020 Budget is due to take place on 11 March 2020. Theoretically, that is the earliest date any changes to Entrepreneurs’ Relief could take effect, although it is quite possible that such changes would not take effect until the new tax year on 6 April 2020 at the earliest. It would not be unusual for there to be a consultation process before the changes take effect the following year. For the moment, there is no certainty as to if and when any changes will come into force.
What can I do if I want to make sure I get Entrepreneurs’ Relief?
If any individuals are concerned about the potential changes, and want to make sure they get Entrepreneurs’ Relief under the current rules, it would be necessary to crystallise the capital gain qualifying for Entrepreneurs’ Relief before the changes take effect. To be absolutely safe, that would mean disposing of your Entrepreneurs’ Relief qualifying business, shares or assets before 11 March 2020. If you have a plan or deal to sell already, it may be possible to bring the disposal forward. Alternatively, it may be possible to sign an unconditional contract to sell to another company that you own (or a new company) prior to 11 March 2020, with a view to completing it at a later date. This should, if the sale actually goes ahead, fix the date of disposal of the asset before 11 March 2020. You could then complete the sale or sell the Buyer to a third party with the benefit of the unconditional contract. The key is that it must be a genuine, unconditional contract. Another alternative to create a disposal for these purposes could involve trust planning, if this is suitable for your particular circumstances. In each case, appropriate tax and legal advice would be necessary.
This article is for information only. For further information regarding Entrepreneurs’ Relief, please contact a member of our Corporate Tax Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2020.