Residential property
08 Nov 2018 News

Entrepreneurs' Relief. Further Tightening of Rules In The Budget

Entrepreneurs’ Relief is a valuable tax relief which reduces the rate of capital gains tax on qualifying gains from 20% to 10% up to a maximum lifetime limit of £10 million.

There were fears that this relief might have been withdrawn in the Budget but, instead, the Chancellor has announced further changes to the rules in an attempt to better target the relief at those individuals engaged in true entrepreneurial activity.

There were two main changes:

  • An extension to the minimum qualifying ownership period from 12 months to 2 years; and
  • The addition of two new tests to the definition of “personal company” in the context of the relief being claimed when shares are sold.

 Extension to Minimum Qualifying Period

At present, entrepreneurs’ relief is available where various qualifying conditions are satisfied throughout a minimum ownership period of 12 months ending with the date of disposal or sale.

For sales or disposals taking place on or after 6 April 2019, the minimum qualifying period will be doubled to two years.

 Definition of “Personal Company”

Up until Budget Day, a company was an individual’s “personal company” if they owned at least 5% of the ordinary share capital which allowed them to control at least 5% of the voting rights. 

Two new tests were added with effect from 29th October.  Now, in addition to the above, the shareholder must also be beneficially entitled to (i) at least 5% of the company’s distributable profits; and (ii) at least 5% of the assets available for distribution to equity holders on a winding up.

 Enterprise Management Incentive

Individuals who acquire their shares by exercising options issued under an Enterprise Management Incentive (EMI) scheme benefit from two relaxations to the normal entrepreneurs’ relief rules.  First of all, they do not need to satisfy the 5% tests in the definition of “personal company”.  Secondly, they do not have to own the shares for the minimum qualifying period.  It is sufficient that the EMI options themselves have been held for the minimum qualifying period – effectively, the qualifying period starts to run from the date the options are granted and it does not matter when they are actually exercised.

As a result of the changes announced in the Budget, from 6 April 2019 the sale of EMI shares will only qualify for entrepreneurs’ relief if the EMI options were granted at least two years earlier and the other qualifying conditions have been satisfied throughout that period.

As the 5% tests do not apply to EMI shares, the changes to the definition of “personal company” will not have any effect on the holders of EMI shares or options.

For further information please contact Anne Marie Renz or a member of the tax team.

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