Relief over amendment to Entrepreneurs’ Relief

Amendments to the draft legislation on Entrepreneurs' Relief, arising out of the Chancellor's Autumn 2018 budget, have removed uncertainty for some shareholders whom it was suggested might no longer qualify for this valuable relief. 

Entrepreneurs’ Relief allows taxpayers to pay a lower 10% rate of tax on capital gains arising from qualifying sales or gifts of business assets or shares.  It is a very valuable relief for the shareholder, since the rate that would otherwise apply would typically be 20%. 

In his Autumn 2018 budget the Chancellor announced that the conditions for shareholders to obtain Entrepreneurs’ Relief when selling their shares would immediately be tightened up by imposing additional conditions, with the intention of addressing particular forms of abuse by taxpayers.  However, the new rules were drafted so that they potentially excluded from qualifying many more shareholders than were intended. 

In addition to the company meeting the definition of a “trading company”, the existing rules require a shareholder to have 5% of the voting rights and ordinary shares in the company.  The originally proposed amendments also required the shareholder to have entitlement to 5% of distributable profits and of assets on a winding up of the company. 

Two particular groups of shareholders were identified as being adversely affected by this change 

• those in companies where venture capital investment takes the form of different classes of shares or debt that give the investors tiered returns or priority returns relative to the other shareholders; and 
• companies with different classes of share that can receive dividends independent of each other.   

The Institute of Chartered Accountants in England and Wales and the Chartered Institute of Tax raised this matter with HMRC and had a number of meetings and discussions in respect of them.  This has resulted in amendments to the draft legislation, providing an alternative new test for shareholders to meet.  The originally proposed new conditions remain, but shareholders who do not meet them can now alternatively qualify if they would be entitled to 5% of the proceeds on a sale of all of the company’s ordinary shares.  In either case the existing conditions must also still be met. 

Care may still be needed where different classes of share exist, for example where their rights are connected to growth of the company, and from April 2019 the qualifying period during which the conditions must be met increases to 2 years, but this clarification will mean that many entrepreneurs who would otherwise have unexpectedly lost the relief can continue to hope to utilise it when they come to sell their shares.

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