New Entrepreneur’s Relief Test – An End to the Uncertainty?

Will Sweeney - Menzies Accountant

Analysis by Will Sweeney – Tax Technical Specialist

Amidst the recent focus on Brexit, you could be forgiven for not noticing the approval of the Finance Bill by the House of Commons. With the Lords restricted to an advisory role on finance matters, this means that the Finance Bill is effectively agreed for this year.

A welcome change introduced at the last hour saw key amendments to the government’s proposed changes to Entrepreneurs’ Relief (ER). These amendments will be a relief for many business owners considering a sale as they resolve much of uncertainty introduced by the original measures.

What was the issue?

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.

In relation to companies, the existing ER rules require an individual to dispose of their ‘personal company’. The recent Budget contained significant changes to the definition of a personal company, requiring a claimant to have an entitlement to 5% of the company’s distributable profits and net assets.

The original proposals made 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.

What has been done?

The revised rules add an alternative economic test, which would instead make ER available if the shareholder would be entitled to 5% of the proceeds on the sale of all of the business’ ordinary share capital. The sale value is taken to be the market value at the end of the period.

Our Verdict

The new test resolves much of the uncertainty and is likely to be preferred in practice as it is likely to be more straightforward to determine whether the shareholder meets the condition. However, it is worth remembering that even these revised measures have introduced considerable extra complexity into the ER rules. We would advise that, before 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.

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