Budget 2018 - Entrepreneurs' Relief changes

Entrepreneurs’ relief has been a valuable relief for individuals selling their interests in trading businesses or companies since its introduction ten years ago.  Mr Hammond proposed three amendments to the rules governing entitlement to claim the relief, two of which impose increased conditions and the third is a relaxation. 

These are:

-              additional conditions for a share disposal to qualify for relief

-              an extension of the minimum qualifying period

-              relief for shareholders when their interest is diluted

The most common application of Entrepreneurs Relief is on the disposal of an individual’s shareholding in their personal trading company and the proposed amendments will impact on these transactions substantially. However, it should be noted that the extension of the minimum qualifying period will apply to disposals in relation to unincorporated businesses too.

Additional qualifying conditions for shareholdings

For an individual to benefit from relief when they sell shares, one of the conditions is that the company is what is referred to as a “personal company” in respect of that individual.  Previously that meant that they must have held, for a qualifying period, shares that represent at least 5% of the ordinary share capital of the company and give them at least 5% of the voting rights.

With immediate effect [as always, on the assumption that the proposals are enacted as drafted] there are additional conditions placed on the rights attached to the shares.  As well as giving at least 5% of the voting rights, the shares must now also give entitlement to as least 5% of the assets of the company on a winding up and entitlement to 5% of the distributable profits.

Where a company has a single class of ordinary shares in issue this should not affect the shareholders’ entitlement to relief.  However, where there are different classes of share that give different voting or dividend rights they may cease to be eligible as a result of these changes.  Some clarification of how beneficial entitlement to profits will be interpreted in this context is to be hoped for, to avoid uncertainty for taxpayers.

Extension of the minimum qualifying period

Currently it is necessary for an individual to meet the various qualifying conditions, including those referred to above for shareholders, for a minimum of one year.  For disposals after 5 April 2019 the qualifying conditions must be met for at least two years, except where the underlying trade had already ceased prior to 29 October 2018.

Planning well in advance of disposals may consequently be more important for some individuals.

Relief on dilution of shareholdings

Currently where a shareholder has a qualifying 5% interest that becomes diluted down to below 5%, perhaps through a company issuing additional shares to employees exercising share options or raising additional capital from other investors, entitlement to entrepreneurs’ relief would be lost entirely. 

After 5 April 2019, when a qualifying interest is diluted to below 5% by the issue of shares for cash the shareholder will be able to make an election to trigger a deemed disposal and consequently a capital gain at that date, allowing them to claim entrepreneurs’ relief.  They can also elect to defer that notional gain until they actually dispose of the shares and claim entrepreneurs’ relief on the deferred gain.

Requiring the new shares, which trigger the dilution, to be issued for cash means that this option will not be available to shareholders in all scenarios, such as where the company acquires another business and issues shares as consideration.

If this year's budget contained any points that you would like to discuss further, then a member of our tax team would be willing to help.

See also;

• How the budget 2018 affects Private Client isssues
• How the budget 2018 affects Business and other Taxes
• Budget 2018 summary in full