The recent Budget contained important changes to Entrepreneurs’ Relief (ER), which have introduced unwelcome uncertainty for any business owners who may be considering a sale.
Broadly, ER can currently reduce the rate of capital gains tax from 20% to 10% on capital gains of up to £10 million, a maximum saving of £1m, and so is a key relief for business owners.
How will companies be impacted?
In relation to companies, the existing ER rules require an individual to dispose of their ‘personal company’. Two new tests are to be added to the definition of a personal company with immediate effect, requiring a claimant to have an entitlement to 5% of the distributable profits and net assets.
For many businesses, this is unlikely to present a problem but the wording of the draft legislation makes it unclear whether this entitlement could be challenged if the company has more complex share capital arrangements (eg alphabet shares, growth shares) at any time during the ER qualifying period – which is also to be extended from 12 months to 24 months from April 2019.
What’s going to happen next?
Following the announcement of this measure, HMRC have been consulting with the accounting profession, and we hope to gain clarity on this measure soon. Until then, we would advise that if you are considering any transactions you should speak to your Menzies advisor, as it may be necessary to plan well in advance to ensure that you benefit from this valuable relief.
Richard Godmon is a Tax Partner at Menzies LLP – to discuss how the updates to Entrepreneurs relief might impact your business, contact him by phone on +44 (0)1489 566709 via email at RGodmon@menzies.co.uk.