Shareholders who do not meet the new profits and assets tests may now still qualify for Entrepreneurs’ Relief.
The Autumn Budget on 29 October 2018 introduced changes with immediate effect to the qualifying conditions for CGT entrepreneurs’ relief (ER) which significantly impacted the number of entrepreneurs and shareholders who could qualify for the relief (thereby benefiting from the 10 percent CGT tax rate when they sell their trading businesses). On 20 December 2018 a welcome Government amendment to the Finance Bill introduced a new economic condition in order to more accurately target the 10 percent tax relief (and to allay the many concerns which arose when the initial changes were announced). The ER rules now include an alternative economic test as to whether the selling shareholder receives 5 percent of the proceeds from the sale. This Finance Bill amendment was approved as it completed its passage through the House of Commons.
You can view our previous article entitled “Entrepreneurs’ Relief changes impact owners, investors and management equity” here. This new alternative economic test would need to be met alongside the ‘other’ conditions for ER including the requirement that the company is a trading company (or group) and that the shareholder is an employee or officeholder and holds five percent of the ordinary share capital and voting rights. If all the conditions for the relief are satisfied for the relevant time period (12 or 24 months depending on the date of the sale), the selling shareholder should benefit from the 10 percent capital gains tax rate on up to £10,000,000 of lifetime capital gains they realise.
ER continues to be an incredibly valuable tax relief, but there remain quirks in the tax legislation which mean that shareholders who expect to qualify for the relief may not, particularly where the company has shares of differing nominal value or certain growth shares, and/or where the company has issued preference shares. Shareholders who wish to benefit from ER should therefore ensure they review their position as a matter of urgency.
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