26 November 2018

Budget update on Entrepreneurs Relief

Despite concerns it could be abolished, ER remains for the time being - but with some changes

Since 2008, Entrepreneurs Relief has reduced the amount of Capital Gains Tax charged on capital on the disposal of certain types of business interests, and shares in unquoted trading companies, from the headline rate of 20% to 10%. 

Although a number of conditions have to be met, this has been a particularly generous tax break for those selling business interests, and who have been involved in the running of the business. 

There had been some concern that the October Budget could have seen the relief reduced, or even abolished.  That did not happen, but there were some changes made that those expecting to claim the relief on a future sale of shares, or business interest, should be aware of:

  1. To be an eligible disposal for Entrepreneurs Relief purposes, the qualifying conditions have to have been met for one year before the date of disposal.   

    With effect from 6 April 2019, that one-year period is increased to two years; though where the business or company had already ceased trading before Budget day, the one year period is preserved for disposals made within three years, from the date of cessation.
  2. The second change essentially just corrects an anomaly within the existing rules, by allowing the aggregation of the periods where a business has been carried on as a sole trade or partnership and then incorporated into a company.  

    From 6 April 2019, when determining whether the shares being sold have been held for the required two-year period, the period that the company’s business was operated as a sole trader or partnership, can now be aggregated with the period during which the company’s shares have been held.
  3. The third change is probably the most significant, and tightens the definition of qualifying shares: as well as owning sufficient shares to give the vendor at least 5% of the company’s voting rights, the vendor must, from 6 April 2019, also hold sufficient shares to give the vendor entitlement to at least 5% of the company’s profits available for distribution, and entitlement to at least 5% of the assets on a winding-up.  

    Whilst this change has been introduced to counter-act schemes used to access Entrepreneurs Relief where it wasn’t intended, using contrived share rights, the concern is that it will render ordinary shares of different classes (so called “alphabet shares”) which have been used to differentiate dividends paid to different shareholders groups, no longer eligible for Entrepreneurs Relief.

    The tax profession has already made representations to the Revenue on what seems to be an unintended – and unfair – effect of this change, and so we will have to wait to see whether they are prepared to issue guidance, or clarification on exactly what types of share will or will not be caught by this change to the rules.