Do you still qualify for entrepreneurs’ relief?

The good news is Entrepreneurs’ Relief remains an attractive proposition for many business owners as they look to sell all or part of their company.

The less good news is the changes to the system announced in Chancellor Philip Hammond’s recent Budget, which could impact on their qualification for the scheme.

Two additional tests have been introduced – which means business owners will need to review their situation to ensure that they still qualify.

Entrepreneurs’ Relief (ER) reduces the capital gains tax rate for higher rate taxpayers from 20 per cent to 10 per cent when selling or disposing of all or part of a business.

The aim of the changes is to tighten up the scheme and to ensure that the relief is going to genuine entrepreneurs. There were fears that the scheme could be scrapped, but the Chancellor announced his commitment to continuing ER.

However, the first immediate change, announced by the Chancellor at the end of October, means that entrepreneurs selling their shares or business will have had to have been a qualifying owner for two years to benefit – previously it was one year.

Secondly, from April next year, the qualifying conditions for ER are set to be tightened even further.

To qualify the company has to be an individual’s personal business. That definition has been expanded, so that the shareholder must now be entitled to five per cent of the distributable profits and five per cent of the assets available for distribution to equity shareholders in a winding up.

That is in addition to the present qualifications which stress the shareholder has to hold at least five per cent of the ordinary share capital and that their shareholding entitles them to at least five per cent of voting rights.

In many cases these additions to the rules may have no impact – but if your company has ‘alphabet shares’ – giving directors discretion to declare dividends on one class of shares but not others – there may be an impact.

To discuss these changes and any tax issues please contact me on 01772 430000.

 

 

As Senior Tax Consultant at WNJ I have expertise in trusts and work on a wide range of other tax matters from partnership structures, corporate transactions to Enterprise Investment Schemes. I also advise on capital gains tax and inheritance tax.