Entrepreneurs’ Relief becomes ‘Business Asset Disposal Relief’, and the anti-avoidance measures around the reduced limits are ramped up.
In addition to the headline reduction in the Entrepreneurs’ Relief lifetime allowance announced at the 2020 Budget, further measures have been introduced to counteract actions that may have been taken to ‘bank’ the relief. Perhaps most surprisingly, Entrepreneurs’ Relief will now be known as ‘Business Asset Disposal Relief’.
The change of name does not have any practical impact on the operation of the relief – it remains a 10 percent capital gains tax rate on the disposal of certain business assets (including shares in a trading company), where various conditions are met. The change may well simply be defence against the commentary in the lead up to the Budget that the relief has not met its original objective of driving entrepreneurial behaviours.
The most pertinent change in the Finance Bill is the reduction in the lifetime allowance. For disposals on or after 11 March 2020, Entrepreneurs’ Relief (or, Business Asset Disposal Relief, as it will be known from the 2020/21 tax year onwards) claims will be limited to the first £1million of lifetime gains – meaning any individual who has already claimed Entrepreneurs’ Relief on gains of £1million or more will no longer qualify for the relief on any future disposals. Similarly, even for those who have never made a claim to the relief previously, only the first £1million will be taxable at 10 percent, with the remainder subject to capital gains tax at the prevailing main rate, currently 20 percent (2019/20 rates). At current rates, this makes the relief now worth £100,000, down from £1million at the previous limit.
In addition, the 2020 Budget announcements introduced retrospective anti-forestalling measures which may impact transactions which have exchanged and not completed and which restrict the ability of individuals to bring non-cash consideration into the charge of tax.
The new Finance Bill makes these anti-forestalling measures even more wide-ranging, such that they now also apply to share reorganisations which may have taken place more than 11 months before the Budget.
In particular, these ‘anti-avoidance’ measures could impact transactions that occurred between 6 April 2019 and 11 March 2020, and may subject these transactions to the new £1million lifetime limit. The measures are also wide reaching and may, perhaps unintentionally, catch commercial and non-tax motivated transactions and company restructurings that happened as far back as April 2019.
Investors’ Relief, which enables qualifying shareholders to benefit from a 10 percent rate of capital gains tax on the first £10 million of capital gains, is to continue unchanged. Investors’ Relief is available to investors in qualifying shares of an unlisted trading company (or the holding company of a trading group) but, unlike Entrepreneurs’ Relief, it is only available to investors who are not employees involved in the running of the business.
Shareholders may also want to consider whether they could introduce an ‘Employee Ownership Trust’ to their company. Where a shareholder sells a controlling interest in their company to such a trust, and various conditions are met, a zero percent tax rate is available on any gain that arises on the sale.
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