A little Relief for Entrepreneurs
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Published: 22 Nov 2018
In the 2018 Autumn Statement, the Chancellor introduced some changes to the conditions for claiming Entrepreneur’s Relief (ER) of which you should be aware. ER reduces the rate of capital gains tax on the sale of qualifying trading and private companies to 10%.
Employment condition extended
Firstly, and most importantly, the period in which all conditions for ER should apply has been extended from 12 months to 24 months, with effect from 6th April 2019.
So, amongst others, the minimum 5% ownership of ordinary share capital and employment by the company (e.g. director, secretary or employee) needs to be in place for at least 2 years, if the shares are sold after 6th April 2019.
Also remember the date of sale is the date on which contracts are exchanged and not the later date of sale completion.
So, planning your exit strategy has become even more important. The employment condition employment condition is often overlooked giving rise to a delay in the sale by 12 months, and 24 months after 6th April 2019 in order to qualify for ER.
Opportunity to claim a little extra relief on the sale
Secondly, there is good news that the minimum of 5% ownership of the ordinary share capital is relaxed a little.
If by a rights issue or a further issue of shares, which you do not take up, your shareholding is reduced below 5%, you can elect to claim ER on the fraction of the gain up to the date of the rights or new share issue and defer the 10% on that gain until the whole of the remaining shareholding is sold and taxed at the normal capital gains tax rates 10/20%.
New restriction to relief on some ordinary shares
Finally, the qualification of certain types of ordinary shares may now be restricted with effect from Budget Day (14 November 2018) as follows:-
- Employees who have acquired shares through employee share schemes, particularly EMI shares, may find they have suddenly lost their right to entrepreneurs’ relief, as employee shares tend to be issued with restricted rights.
- Directors and managers who have taken part in a management buyout who hold shares acquired through the buyout may also have few rights to the company’s assets on a winding up, as those asset-related rights will be held by the financers of the deal who have a different class of shares.
- Where an individual sells a business asset in association with a disposal of shares, (an 'associated disposal'), the company in which the shares are held must also be the taxpayer’s personal company. So those taxpayers could also be caught be this change in the personal company conditions.
Individuals who have built up their own company and hold ordinary shares with full voting rights and rights to the company’s assets on a winding-up should not be affected.
If you wish to discuss any points raised in this article please call David Cane on 07749 080 806 or email me.
