In today’s Autumn Budget many of us expected to see a change to Entrepreneurs’ Relief (ER) and some thought it could be abolished altogether. However, even though ER remains, the Chancellor announced changes that are likely to have a significant impact to those who are currently selling their shares in a business. It could also affect those who are in the process of acquiring shares in companies, with the intention of being entitled ER. This could include employees planning to invest in their employers business.
The Chancellor announced that the 12 month initial ownership period would be extended to 24 months. This seemed to be fairly significant in itself, until the detail; the two year ownership period was small in comparison to the remaining changes that will come into force today.
What has changed?
Prior to today’s announcement, in order to claim ER, you must hold at least 5% of the voting rights and 5% of the Ordinary Share Capital. Amongst other things, both of these criteria must be met in order to claim Entrepreneurs’ Relief on the sale of shares.
The meaning of Ordinary Share Capital has resulted in wide spread tax planning whereby shares have 5% of the Ordinary Share Capital but not necessarily 5% of the economic value. For example, rights to dividends and capital on the sale or winding up of a business.
This type of tax planning is wide spread and well within the law however it seems to have now been tagged as ‘not in the spirit of the law’. Therefore new measures have been inserted and these measures mean that any gains from disposals after today will only attract ER where, amongst other things, all of the following are met:-
- 5% of the voting rights
- 5% of the distributable reserves
- 5% of the capital in the event of a sale of winding up
Furthermore, from April 2019, these must have all been met for two years. Care should be taken however, because a simple change to the class rights of the share capital has the potential to increase the value of the shares. This could be an issue as this could have quite a nasty side effect.
What is the impact of the changes?
Anyone selling their shares between 29 October 2018 and 5 April 2019 who do not currently own 5% of the economic value of the company, will no longer enjoy the reduced ER rate of 10% as opposed to a maximum Capital Gains Tax rate of 20%. For anyone disposing of shares after 5 April 2019 will require a minimum holding period of two years of the 5% economic value before they’re entitled to ER. So they can expect to pay a maximum Capital Gains Tax rate of 20% instead.