Entrepreneurs and business owners should review their business structures in light of Capital Gains Tax changes.
The government announced in the Autumn Budget 2018 changes to entrepreneurs’ relief.
Business owners, entrepreneurs and shareholders should now review the impact of these changes to avoid any pitfalls and maximise opportunities. The new capital gains tax (CGT) rules, now in Finance Act 2019, place more onerous requirements on entrepreneurs before they can secure the relief.
There is no change to the basic principle. Entrepreneurs’ relief gives a reduced 10% tax on disposals of businesses, or shares in a “personal trading company”. For gains made by an individual after 5 April 2008, there is a lifetime limit of £10,000,000.
Entrepreneurs’ relief can apply to a number of different business assets including sole trade businesses, partnerships and shares in a company, provided certain conditions are met. The key changes are explained below.
Qualifying ownership period increased to two years
Prior to the changes, to qualify for entrepreneurs’ relief, business assets must have been owned for at least 1 year. This has now been increased to two years.
Prior to 6 April 2019 - The relief, primarily available where there is a “material disposal” of “business assets”, meant that for a one year period leading up to the disposal the entrepreneur 1) worked for the company and 2) the company was the taxpayer’s “personal trading company“ (see below). In the case of a sole trade or partnership, the entrepreneur must have owned the business, or been a partner, for that 1 year period.
Post 6 April 2019 - For disposals on or after 6 April 2019, the qualifying period for material disposals has been increased to two years. Taxpayers will therefore need to review their business or corporate structures and the tax implications of a disposal further in advance.
New “economic interest” requirement for disposals of company shares after 28 October 2018
In order to meet the “personal trading company” requirement, the entrepreneur must have at least 5% of the ordinary shares and 5% of the voting rights of the company (the company must also be trading for the purposes of the legislation).
Under the new rules there is a further requirement. Where a disposal is made on or after 29 October 2018, the original 5% conditions still apply, but in addition the individual must have a sufficient economic interest in the company. The entrepreneur must demonstrate this by meeting one or both of the following:
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The holding would entitle the individual to at least 5% of the profits available for distribution and would entitle the individual to at least 5% of the company’s assets on a winding up. There are specific definitions of “equity” and “equity holders” which the entrepreneur/company will need to fall within.
- The individual would be entitled to at least 5% of the proceeds of a disposal of the whole of the ordinary share capital of the company.
HMRC’s policy paper on the changes stated that they were designed to ensure that only shareholders with a true material stake in a business can benefit from entrepreneurs’ relief, in order to distinguish true entrepreneurial activity from involvement of a purely investment or employment nature. However, where complex structures exist it may be difficult to apply the tests and demonstrate that the requirements are met, for example in the case of point 1 above, where preference shares or growth shares are held.
The new changes may in practice already be met, but expert advice should be obtained as early as possible to maximise the available relief under the amended rules.
HMRC’s guidance can be found here >.
Published: April 2019
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