Do you still qualify for Business Asset Disposal Relief (Entrepreneurs’ Relief)?
In previous Pathfinder – Business update e-newsletters we have discussed selling your company and securing your 10% tax rate and considering a tax-efficient exit. The key relief which is hinged on a securing the 10% tax rate is Entrepreneurs’ Relief (ER).
During the last couple of years, there have been some significant changes to Entrepreneurs’ Relief, including from 6 April 2020 the relief is to be known as Business Asset Disposal Relief. With the exception of the name change, the changes have been threefold. In the Autumn 2018 Budget, the Chancellor announced stricter rules for share disposals, in 2019 the ownership period increased and in the Spring 2020 Budget the lifetime allowance was slashed to £1million.
We discuss below the updated requirements for those of you holding shares in a trading company.
Overview of the relief
ER reduces the amount of capital gains tax on a disposal of a qualifying business asset, provided you have met the qualifying conditions throughout a qualifying period up to the date of disposal. The relief allows for a lifetime allowance of £1million (previously £10million up to 5 April 2020) of gains to be subject to capital gains tax at a rate of 10%, as opposed to the 20% rate normally applicable to higher rate taxpayers.
A disposal of shares in your personal company will qualify for ER if, throughout a qualifying period of two years up to the date of disposal (there was only a one year holding period for disposals up to 5 April 2019), the following conditions were satisfied:
- You must hold qualifying shares;
- You must be either an officer or employee of the company or group; and
- The company is a trading company, or the holding company of a trading group.
Qualifying shares are those where you have:
- A holding of at least 5% of the ordinary share capital measured by nominal value;
- A beneficial entitlement to 5% voting rights by reason of those shares; and
- A beneficial entitlement to either:
(i) 5% assets on winding up and entitlement to 5% distributable profits, or
(ii) in the event of a disposal of the whole of the ordinary share capital of the company, beneficial entitlement to at least 5% of the proceeds.
Prior to 28 October 2018, the only requirements for qualifying shares were points 1 and 2 above. The new conditions look to tighten the rules so that eligible shareholders have an entitlement to 5% of the ’economic value’ of the company.
There are special rules where you acquired your shares via an Enterprise Management Incentive (EMI) share scheme.
What could the changes mean to you?
The changes announced could mean that if your company has multiple share classes you may no longer qualify for ER when you dispose of your shares.
In particular, if you have ‘growth’ shares (where you only receive a proportion of the value over a threshold level) you may well not be entitled to 5% of the proceeds on a sale, and so under the new amended rules would not qualify for ER.
If you have ‘alphabet’ shares where the only difference between the shares is the ability to pay different dividends then you should continue to qualify for ER if you will be entitled to receive at least 5% of the proceeds in the event of a sale.
The legislation also extended the qualifying period for ER conditions from one year to two years for disposals made on or after 6 April 2019, so if any changes do need to be made to share rights it will be two years before a disposal of affected shares could qualify for ER.
We will need to wait for further detailed guidance and any further amendments to the legislation by government before we can confirm whether and to what extent individuals will be impacted.
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