Entrepreneurs relief (ER) quick recap

Entrepreneurs relief (ER) quick recap

 

Entrepreneurs’ Relief reduces the amount of Capital Gains Tax payable when you dispose of (sell) shares in all or part of your business from 20% to 10%.

 

There’s no limit to how many times you can claim and you can claim up to £10 million of relief during your lifetime. The same rules apply regardless of the rate of income tax you pay.

 

The company must be a trading company or a holding company of a trading company.

 

The person disposing of the shares must also be an officer or employee of the company, and all employment conditions must have been met for at least the 24 months leading up to the disposal.

 

Changes in the legislation

 

The Finance Bill 2018/19 contained legislation outlining two changes to ER introduced in the 2018 Budget. The changes will reduce the number of shareholders entitled to claim ER, and create additional complexity in determining whether claims are valid.

 

The company must have traded in the 24 months leading up to the date of the share disposal, previously this was 12 months.

 

Where the claimant’s business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group) before 29 October 2018, the existing one year qualifying period will continue to apply

How has the ER ‘holding period’ changed?

The Chancellor announced an increase to the holding period for shares held by individual shareholders. Individuals will now need to hold the shares for at least 24 months rather than the current 12 months before they can claim ER. This change will apply to disposals made on or after 6 April 2019. Individuals who have held their shares for more than one year but less than two at the date of disposal would pay a higher rate of CGT.

5% test for Entrepreneurs’ relief

The second change introduced further tests that must be satisfied before ER is available. This means that along with the existing requirement that an individual holds 5% of the ordinary share capital and votes of the company, (test 1), the individual must also be ‘beneficially entitled to’ either:

 

  1. 5% of profits (dividends), and assets available for distribution to equity holders on a winding up of the company (test 2), or
  2. 5% of the sale proceeds had the whole of the ordinary share capital of the company been sold on the day of the disposal (test 3).

 

Any individuals who sell shares without satisfying these 5% tests (either tests 1 and 2 or tests 1 and 3) will not be eligible for ER.

 

When individuals look to consider whether they can claim ER they should first check that they satisfy test 1 (ie ordinary share capital and votes) for the two year holding period. If this is satisfied, they will probably next consider test 3.  Test 2 can be very complex.

When the original Finance Bill was published on October 2018, it contained only test 2. After discussing these difficulties with professional bodies in late 2019, the Government proposed a further amendment to the Finance Bill to insert the alternative test (test 3). While still an anti-avoidance provision, test 3 is expected to be considerably more straightforward to apply. 

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