New restrictions added to entrepreneur’s relief (ER) during the 2018 Budget have reduced access to this valuable tax relief.
ER provides a reduced rate of capital gains tax on disposal of shares – at 10% instead of 20% – for individuals, provided they meet certain conditions. These conditions need to be met throughout a qualifying period, reflecting ongoing involvement with a business.
From 6 April 2019 the qualifying period will increase from one to two years. This change means individuals will have to demonstrate a longer ongoing involvement with a company to claim the relief.
Specific new requirements on the shareholding were also introduced. Effective from 29 October 2018, to claim the relief an individual must have shares that:
• Entitle them to at least 5% of dividends or profit distributions.
• Entitle them to at least 5% of assets on winding up.
These are in addition to the current requirements to have at least 5% of the share capital of the company and at least 5% of the voting rights. However, to balance this, from April where outside investment dilutes a shareholding to less than 5%, relief on gains made up to that point will be protected.
Different rules apply to shares acquired through an enterprise management incentive schemes, and other qualifying conditions will apply.
The rules have been changed in response to calls on the government to use the revenue lost to ER to help fund the NHS. Instead of abolishing the relief entirely, the Chancellor has adjusted the rules as he believes, “encouraging entrepreneurs must be at the heart of our strategy”.
Get in touch with one of SMH’s experts today if you are concerned about how the new rules will affect your plans.
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