Entrepreneurs’ relief changes

FA 2019, Schedule 16 has introduced four changes to entrepreneurs’ relief (ER). The new conditions for an individual’s shareholding in their personal company to qualify for ER took effect from 28 October 2018, as we explained in our newsletters on 1 November 2018 and 10 January 2019. The three other changes to ER take effect for disposals made after 5 April 2019.

Qualification period

First the bad news; for disposals after 5 April 2019 all the qualifying conditions for ER must be in place for at least 24 months to the date of disposal, or to the date the business ceases to trade. If you are planning to wind down their business and sell-off the assets, it may be better to cease trading before 6 April 2019 to ensure the ER conditions only have to be met for 12 months rather than 24 months. This may be important where a spouse or partner has joined the business or acquired some shares, but they haven’t built up a 24-month history with the business.

Look through incorporation

Where a business incorporates the qualification clock for the ER conditions is set back to zero on the issue of the shares, or on date the on which the company starts trading, whichever is the later. Where the shareholders receive an offer for the company shortly after incorporation, they will be denied ER as they won’t have built up full qualification period of share ownership.

The good news is that for disposals after 5 April 2019 the qualification period for ER can look through the incorporation and include the period during which the business was owned by the current shareholders. This look-through only applies if the shares were acquired wholly or partly in exchange for the transfer of the business as a going concern, and all the assets of the business, other than cash, must have been transferred to the company. These are the conditions under which incorporation relief applies (TCGA 1992, s 162).

If you are planning to incorporate their business, make sure that incorporation relief does apply as an insurance policy against a quick sale of the company.

Dilution of shareholding

Where equity investment is raised from outside investors, it can dilute the holdings of existing shareholders to below 5% of ordinary share capital, stripping away their rights to ER.

For new share issues made from 6 April 2019, the existing shareholders can preserve their ER by making two elections (TCGA 1992, s 169SC and s169SD). The first election creates a deemed sale and reacquisition of their shares, crystallising the gain on which ER can be claimed, and the second election defers the CGT due until their shares are sold. These elections must be made by the first anniversary of 31 January following the tax year in which the additional shares are issued.

Written by the Tax Advice Network