Entrepreneurs’ Relief Budget changes October 2018
What are the changes to Entrepreneurs’ Relief?
After continued speculation about whether Entrepreneurs’ Relief (* see note below) will be reduced or abolished, the Chancellor has announced two changes. These are as follows:
A. Extension of qualifying period from 12 months to two years:
This change, generally effective for disposals on or after 6 April 2019, means that where there is:
• A disposal of shares, the qualifying period for meeting the qualifying conditions is now two years. This new limit also applies to shares acquired under EMI options.
• A disposal of a business or assets used for a business, the qualifying period is two years.
Note: The existing qualifying period is one year.
Ask yourself: “How long have I held the shares in my Company?” If it will be less than two years on 6th April 2019, then will you be affected.
If not then this will not have a major impact on many long established businesses. The relief may be restricted. This happens when someone has recently invested in a business within that two year period e.g. the granting of EMI options or new shareholders.
Where vendors are in negotiations and there is a holding period of less than two years at 6th April 2019, then consider the negotiating tactics, on both sides, to ensure the sale is completed before 6th April 2019 if the relief is required.
If EMI options have been granted in say the last six months, will the employees still be entitled to the relief when the options are exercised just before the sale is completed?
B. Change in the definition of a “personal company”:
This change is generally effective for disposals after 29 October 2018. It sets out two new conditions requiring the claimant to have a 5% interest in both the distributable profits and the net assets of the company. The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be available.
The additional new conditions require the individual to be beneficially entitled to at least:
• 5% of the company’s distributable profits
• 5% of its assets available for distribution to equity holders in a winding up
• References to the company include any other company which is a member of the same group.
There is not much that can be done as the legislation will be effective from budget day.
So, ask yourself: “Does my company have a share structure which consists purely of ordinary shares?” if so, then these new conditions could not affect you.
HMRC set out examples of what is and what is not an ordinary share. Where entrepreneurs’ relief is intended to be claimed, be careful as any share capital comprising anything other than plan ‘vanilla’ ordinary shares is going to be challenged. the sale will not being entitled to the relief.
Where your company’s share capital does not comprise a simple structure, then advice must be taken to see what changes need to be made to avoid prejudicing the relief.
If you are planning to sell your business and would like to talk over a coffee about anything you find of interest from this blog, then please do contact me.
The information about me includes why you should use me; how I keep my clients happy and build trust with them.
I specialise in creating plans designed to enable business owners to prepare for and achieve eventual succession of their business.
I believe in helping owners to maximise the value in their business and to realise that value and so move onto the next stage of their life.
Firstly, wnding up a business is seldom the right or only option.
And so as one owner said “I’ve only got one realistic go at this sale to get the best price, we cannot afford to get it wrong, that’s why I used an adviser such as Andrew who specialises in selling businesses”
Finally, business owners work hard over long periods of time and I believe they deserve to receive something when they leave.
If you would like to see what business opportunities there are look at our register on the page
*Here is a very brief description of Entrepreneurs’ Relief.
It is a very complicated piece of legislation and so these notes cannot be relied upon as professional advice. Specific advice must be taken if a future claim is being contemplated.
Entrepreneurs’ Relief may be claimed by individuals or trustees who sell shares or securities in a trading company or dispose of the whole or part of a trading business, providing certain conditions are met.
The relief is available on up to £10 million of lifetime gains arising from 6 April 2008. Gains realised before 6 April 2008 do not restrict the availability of the lifetime limit. The relief can reduce the effective rate of tax from 28% to 10%. It can be worth up to £1.8 million in tax savings for each individual.
The qualifying conditions to claim the relief vary depending on whether an individual is selling shares in a trading company or disposing of an interest in a business. In addition there are different criteria where trustees are seeking to claim the relief.
Shares or securities
In order to claim the relief on the sale of shares, the following conditions must be met:
• The shares must be held in a trading company or in the holding company of a trading group; and
• The individual vendor must be an officer or employee of the company or a company within the same group; and
• The vendor must own at least 5% of the company’s ordinary share capital and be able to exercise 5% of the voting rights within the company. (unless the shares were acquired under a qualifying EMI share option).
All of the above conditions must be met throughout the 12 month period (that was up to 6th April 2019) leading up the date of disposal where the company continues to trade to that time; or
You do not have to sell all your shareholding to qualify for the relief. For example, if you own 40 shares out of a total issue of 100 and sell 20 shares, retaining 20, you could claim Entrepreneur’s Relief on the disposal. You can remain a director or employee after the disposal. In fact you would probably prefer to do so in order to remain qualifying for the relief on a future disposal of the retained shares.
When you come to sell the remaining 20 shares, Entrepreneur’s Relief is available on that gain. You must continue to meet the conditions and subject to a maximum lifetime allowance of £10m.
Definition of a trading company
This is a company carrying on trading activities which does not include ‘to a substantial extent activities other than trading activities.’
Non-trading activities include investment in property, share portfolios, bonds etc.