The Budget announced changes to Entrepreneurs’ Relief – this is what owners, investors and management teams need to know.
Entrepreneurs’ Relief (ER) is a valuable relief that can mean an individual pays CGT on the disposal of shares at 10 percent, rather than at the standard rate of 20 percent. To qualify for ER, certain conditions must be met during a ‘holding period’ that, in most cases, ends on the date of disposal of the relevant shares. However, two important changes were announced at the Autumn Budget. From 29 October 2018 two additional conditions in relation to the economic rights of shares must be met in order for a disposal of shares to qualify for ER, and from 6 April 2019 the ‘holding period’ will increase from one to two years.
Background Our previous article Autumn Budget: Changes to capital gains tax Entrepreneurs’ Relief, highlights that the tightening of the qualifying conditions (effective from 29 October 2018) governing the economic share rights to which an individual must be entitled will have wide ranging implications. Our initial comments on the effect on management equity are available here.
The draft legislation published on 29 October 2018 is extremely wide in scope and there is current uncertainty as to the intended impact of these new rules.
As a general point, all shareholders who qualified for ER prior to the Autumn Budget should review their positions as soon as possible to confirm whether or not they should still qualify. Specifically, shareholders need to be aware that as the new rules are currently drafted, they could – depending on the specific structures involved – deny ER in unexpected circumstances. These include where:
We do not think that the Government intends the scope of the new legislation to be as broad as it appears, and are currently engaging with HMRC to confirm their view. We understand that HMRC are taking legal advice. In the meantime, the intended scope of these rules remains unclear and the position is developing on a daily basis.
If you have share structures which involve differing income and capital rights and are hoping to be able to benefit from ER, then please speak to your usual contact.