17 January 2019

Changes to the Entrepreneurs’ Relief rules

Following criticism of the Autumn budget changes to ER, HMRC announce a new test which can be used instead of the distributable profits and net assets test

Entrepreneurs’ Relief (‘ER’) can reduce the amount of capital gains tax payable by and individual on the disposal of shares in their personal trading company from 20% to 10%.

The 2018 Autumn Budget introduced an additional hurdle to claiming ER.  Previously, individuals were required to hold at least 5% voting rights and ordinary share capital in the company for the relief to apply. The Budget introduced a third test requiring taxpayers to also be entitled to 5% of the company’s profits available for distribution and rights to net assets on winding up, which significantly restricted the availability of the relief to business owners, particularly ones with alphabet shares.

However on 21 December 2018, in response to criticism of the Autumn Budget changes, HMRC announced a new test which can be used instead of the distributable profits and net assets test. Now, taxpayers can also meet the third prong of the test if they are beneficially entitled to at least 5% of the proceeds in the event of a disposal of the ordinary share capital of the company. This alternative is intended to help those who are not able to meet the original test for commercial reasons.

These new tests must again be met throughout the period of 1 year prior to disposal of the shares (to increase to 2 years from 6 April 2019).