For business owners, Entrepreneurs’ Relief (ER) is an attractive Tax relief which can be used on the disposal of a business. Owners of Limited companies, unincorporated businesses and even Trustees may be able to take advantage of ER. Any Capital Gain made on the disposal of a business may be taxed at a 10% rate of Tax. There is a lifetime limit of £ 10 million.
The relief was tightened up by the Chancellor in the 2018 Budget. He did this by announcing additional conditions that need to be met to obtain the relief. Some of these have come into effect and some come into effect from 6 April 2019. You need to make sure you meet these rules rather than breach them so that you are eligible for your ER when you dispose of your business.
Where the Entrepreneurs Relief Applies
The relief applies to gains on sales of qualifying shares in a trading company or the holding company of a trading group.
Unincorporated trading businesses
The relief applies to the owners (sole traders) or partners of such businesses. They may make a gain on the sale of a business or part of a business. It could also apply to the sale of business assets after the end of trading.
Assets used by a company or a partnership
Often an individual owns an asset used by a company he/she owns or it is used by a partnership of which he/she is a member. It can also apply to these assets if they are sold after an individual’s company or partnership has ceased trading.
I am not covering ER as it applies to Trustees in this blog. If you would like further advice on this please do get in touch.
A summary of the changes
New Two Year Rule
This change will affect all business owners and company shareholders. The period of ownership up to the date of disposal is critical. Previously to get ER the qualifying period of ownership was one year, but this is now extended to two years for disposals on or after 6 April 2019.
New Percentage Rules
Limited company shareholders
To get ER, a company needs to be an ‘individual’s personal company’. This means that during the qualifying period of two years, the following applies:
- The individual must be either a company employee or an office holder (director or company secretary),
- Own at least 5% of the company’s ordinary share capital and
- Be able to exercise 5% of the voting rights.
In addition from 29 October 2018 an individual must satisfy either of the following:
- Distribution tests – This means that the individual by virtue of his/her shareholding is entitled to at least 5% of the company’s distributable profits available to “equity holders” and 5% of the assets available for distribution to “equity holders” in the event of a winding up or
- Proceeds test – individuals in the event of a sale of all the ordinary share capital of the company needs to be beneficially entitled to at least 5% of the proceeds.
The distribution test introduced the term “equity holders” which is more than just the holders of ordinary share capital. The Tax profession has concerns about the wide ranging nature of these tests. The Government has therefore introduced an alternative proceeds test.
The 5% threshold is calculated by looking at the market value of the company at the end of the qualifying period. Unfortunately in situations where the new distribution tests are not met, it will not be possible until the sale of shares to find out whether ER will be available.
Do you need to do anything?
For most shareholders with off the shelf companies with one class of ordinary share capital, the distribution tests are unlikely to cause problems. However if it does mean that your shareholding may not qualify under the new 5% proceeds tests it means that your ER relief has gone as your qualifying ownership period has finished. It will not start until your shareholding has changed.
If you are in doubt about entrepreneur relief, please do get in touch with me on firstname.lastname@example.org