Recent Changes to Entrepreneurs’ Relief
Entrepreneurs’ Relief is a valuable relief to business owners, and when coupled with a company’s solvent liquidation (known as a members’ voluntary liquidation or MVL) can result in gains being taxed at an advantageous rate of 10% if the relevant qualifying conditions are met. Prior to the most recent budget, there was speculation that the relief was to be under attack. In the end, the relief was retained, but two changes were introduced to restrict its availability in certain circumstances.
The first was not particularly controversial. One of the previous conditions to qualify for the relief was that the shares in the company had to have been held for a minimum period of one year. This was extended to two years. HM Treasury stated that the policy intention behind this was to ensure that the relief is “focussed on supporting longer-term investment”, and that the change will not affect 95% of claimants.
This change comes into effect in relation to disposals made on or after 6 April 2019. Owners of companies where the shares have been held for more than one year but less than two, and who do not want to wait for the extended two year qualifying period to expire, will need to take action before the end of the 2018/19 tax year to gain the relief.
The other change proved far more controversial, and came into immediate effect in the budget. This introduced two new tests when claiming relief, such that the claimant must have at least a 5% interest in both the company’s distributable profits and the distributable assets in winding-up, in addition to the previous requirements of 5% of the share capital and voting rights.
The policy intention behind this was that an individual should have a 5% “economic interest” in a company in order to qualify for relief. This addressed “an identified abuse of the current rules” whereby an individual could hold 5% of the votes and nominal value of the company but not have a commensurate economic interest.
A minor furore ensued, as this clearly ignored the many genuine commercial situations where “alphabet” share structures are in common usage, and also many employee share schemes, as employee shares are often issued with restricted rights. The controversy caused the government to back down, and when the Finance Bill was published in late December 2018, this included another alternative test.
As a result, the new requirements do not now need to be met so long as the claimant is instead entitled to 5% of the sale proceeds had all of the ordinary share capital of the company been sold at the same time. This hypothetical sale test is considered to be more straightforward to apply, and is likely to be met if, as a matter of fact, a shareholder is entitled to receive at least 5% of the capital distribution from the solvent liquidation, regardless of the size of the previous interest in distributable profits.
Nevertheless, care needs to be exercised in planning a solvent liquidation to establish whether the relief is available. If you would like to seek further advice regarding this, please contact one of our liquidation experts at WSM Marks Bloom.