Recap – Entrepreneurs’ Relief (ER) reduces the capital gains tax payable by individuals on gains realised on disposals of shares from 20% to 10% subject to a number of conditions.
In the recent Budget the chancellor announced that ER would be restricted from 29 October 2018 so that it would only be available to individuals on disposals of shares where in addition to meeting other qualifying conditions, there is entitlement to at least a 5% interest in both:
• distributable profits, and
• net assets of the company available on a winding up.
It is common in many small and medium sized companies for shares to be held with varying rights, including alphabet shares. Those rights would have to be highly prescriptive to prove this entitlement – many are nowhere near detailed enough to do so. If the Budget proposal had been enacted this could have far reaching consequences, leading to significant increases in capital gains tax for many shareholders.
However, on 21 December 2018 an alternative test was introduced to the Finance Bill. Going forward, an entitlement to at least 5% of sale proceeds in the event of a sale will apply in circumstances where entitlement to profits and assets of the company cannot be demonstrated. The alternative test will mean far fewer shares are affected and so the changes are welcomed.
A note of caution however, the changes could still affect certain shares. It is worth reviewing the rights attributable to your shares or seeking professional advice to ensure ER entitlement is not lost as a result of these changes.
The chancellor also announced the minimum holding period required to qualify for ER would be increased from one year to two years and that individuals whose shareholding is diluted below 5% as a result of a new share issue occurring after 5 April 2019 will qualify for ER on gains up to that time.
For advice on Entrepreneurs’ Relief or other share related issues please contact Dafydd Ford on 01633 653166 or by email – firstname.lastname@example.org