Whenever someone is looking to sell their business almost the first thing they ask (apart from what do you think it is worth?) is whether Entrepreneurs’ Relief (ER) will be available. ER reduces the rate of Capital Gains Tax (CGT) to 10% on the first £10 million of lifetime qualifying gains and so can be worth £1 million in tax savings.
With such a generous relief there are detailed tests to be met and these have been tightened up in the Budget. The new rules will generally apply to disposals on or after 6 April 2019 but with one significant change that takes effect from Monday 29 October.
In summary the changes are: –
- From Monday 29 October, shares (unless acquired under Enterprise Management Incentive (EMI) options) must represent 5% of the capital and votes and be entitled to 5% of the dividends and capital on a winding up;
- For disposals after 5 April 2019, the holding period for assets / EMI options is increased to two years.
One already announced piece of good news is protection for individuals currently holding at least 5% of the ordinary shares of an unlisted company who are subsequently diluted by way of new share subscriptions. Where ER would be lost because less than 5% is then held there is some mitigation. From 6 April 2019 it will be possible to elect to crystallise the gain accrued immediately before the dilution. This gain can be paid or deferred until eventual disposal with the benefit of ER.
Who will be affected by the changes?
Individuals with a small shareholding who had an expectation of losing ER in the future as the business grew as a result of new cash investment.
Individuals who were looking to sell shares / a business after 5 April next year but who will, by then have held the assets for less than two years.
Individuals with EMI options where the company is being sold after 5 April 2019 where the option/share holding period is less than two years.
Individuals holding shares (other than under EMI) that do not entitle them to a total of 5% of the dividends or assets or assets on a winding up – these shares if held in isolation no longer qualify for ER.
What you should consider next
Look at your shareholding history and share rights – is there a risk that ER will be or has been lost?
If so – our initial thoughts: –
- Can a gain be triggered before 5 April 2019 to safeguard the current relief?
- Where individuals have a qualifying holding of any class or ordinary shares, all other shares or securities held qualify for ER, can a small ordinary shareholding be added to bring any special class of shares back into ER qualification?
- Can inter-spouse transfers be used to achieve qualification?
The new rules are complicated and if you think you may be affected please do get in touch with me or your usual Mercer & Hole contact.