Capital Gains Tax: Entrepreneurs’ Relief (ER) Update
Entrepreneurs’ relief is available to sole traders or partners selling or giving away all or part of their business. It is a capital gains relief and is also available to company directors and employees having 5% or more shareholding. If you are eligible for ER, you’ll pay tax at 10% on all gains on qualifying assets.
Available relief
Relief is available where there is either:
- material disposal of business assets
- disposal associated with a material disposal
- disposal of trust business assets.
Qualifying assets
Qualifying assets include:
- whole or part of a sole trade or partnerships,
- assets used in a business, or
- shares in a trading company.
There is a £10 million lifetime limit per individual.
Eligibility – new 5% rules for company shareholders
To qualify for ER, the company needs to be an individual’s “personal company”. This means that an individual must throughout the relevant qualifying period:
- be a company employee or office holder,
- hold at least 5% of the company’s ordinary share capital and
- be able to exercise at least 5% of the voting rights.
For disposals on or after 29 October 2018, an individual must also satisfy either of the following:
- a distribution test, which require the individual, by virtue of that holding, to be entitled to at least 5% of the company’s profits available for distribution to equity holders and 5% of the assets available for distribution to equity holders in a winding up
- a proceeds test, which requires the individual, in the event of a disposal of the whole of the ordinary share capital of the company, to be beneficially entitled to at least 5% of the proceeds.
In the distribution tests the term equity holders is a wider definition than ordinary share capital. As a consequence, the tax profession raised concerns about the wide ranging impact of these tests and, as a result, the government introduced the alternative proceeds test.
In the proceeds test, the 5% threshold is computed by reference to the market value of the company at the end of the qualifying period. That may mean, in situations where the new distribution tests are not met, it may not be known until the disposal of shares whether ER will be available.
Minimum qualifying period
The minimum period throughout which certain conditions must be met to qualify for ER is being increased from one year to two years. This has effect for disposals on or after 6 April 2019 except where a business ceased before 29 October 2018.
Where the claimant’s business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group) before 29 October 2018, the existing one year qualifying period continues to apply.
ER planning
The tightening of the rules means that careful planning and monitoring is essential. In order to qualify for ER, a shareholder must benefit from a genuine economic entitlement to 5% of a company. Special consideration will be necessary where a company has issued preference shares or ‛growth shares’.
Please get in touch
If you’re are considering disposing of part or all of your business, it is important to take professional advice. Please get in touch if you’d like further advice or assistance.
