Entrepreneur’s Relief – Changes to this valuable relief

Entrepreneur’s Relief operates by allowing those running a trading business, either in their own name or through a limited company, to benefit from reduced rates of capital gains tax when they either sell the business or simply cease to trade.

The relief was first introduced for disposals on or after 6 April 2008 and the relief at the time applied only to net lifetime gains up to £1m.  It has since been increased to £2m from 6 April 2010, to £5m from 23 June 2010, and again to £10m from 6 April 2011 where it currently stands.

The relief provides for gains within the lifetime limit to be taxed at a reduced rate of 10% (instead of the usual rate for higher tax rate tax payers of 20%) which gives rise to a potential tax saving of up to £1m.  It is important therefore that such business owners are aware of the rules that allow this relief.

Where an individual operates their business through a limited company and makes a disposal of their shares in that company, then for disposals prior to 29 October 2018 the following conditions must be satisfied for a period of one year prior to disposal:

• The company must be a trading company or the holding company of a trading group.
• You must be an officer or employee of the company.
• You must hold at least 5% of the ordinary share capital in the company.
• You must be able to exercise 5% of the of the voting rights by virtue of your shareholding.

The rules were strengthened with effect from 29 October 2018 with additional criteria being introduced, although these further rules have been subject to changes following comments from a number of professional bodies and individual firms who were worried that certain shareholdings would unintentionally fail to meet the requirements, for example companies with so-called alphabet shares where there is discretion over the declaration of dividends to individual shareholders.

The changes mean that at least one of the following two conditions must also be satisfied to ensure that a disposal of shares in your personal company continues to qualify for entrepreneur’s relief:

• You must be beneficially entitled to at least 5% of the profits available for distribution to shareholders and, on a winding up, be beneficially entitled to at least 5% of the available assets.
• In the event of a disposal of 100% of the company’s ordinary share capital, you would be beneficially entitled to at least 5% of the proceeds.

It should also be noted that a further change to the regulations comes into effect for disposals on or after 6 April 2019.  This requires that the above conditions must to be met for a period of two years up to the date of disposal.

For companies with relatively straight-forward share structures, the only impact of the changes is likely to be the extension of the holding period from one to two years.  For others with different classes of shares or differing share rights and entitlements, you should review your current arrangements to ensure you will continue to benefit from this valuable relief.

As a final note, should you be required to make changes to your business’s share structure to ensure you continue to qualify for entrepreneur’s relief, then this is likely to reset the two-year window, adding further importance to the need to review your current shareholding arrangeme