In the Budget, the Chancellor, Philip Hammond announced two changes to the way Entrepreneurs’ Relief (ER) will operate. ER applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available Capital Gains Tax (CGT) of 10% is payable in place of the standard rate. CGT on the disposal of chargeable assets is usually chargeable at 20%. There are a number of qualifying conditions that must be met in order to qualify for ER.
The first change came in with immediate effect on 29 October 2018 with the introduction of two new tests to the definition of a personal company for ER. These tests require the claimant to have a 5% interest in both the distributable profits and the net assets of the company in order to qualify for ER. The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be due.
The second change increases the minimum period during which certain conditions must be met to qualify for ER from one to two years. This measure will have effect for disposals on or after 6 April 2019, unless a business ceased operating before 29 October 2018. This measure will ensure that taxpayers looking to claim ER will be required to have a longer term interest in their business for an extended period of time.
These changes will affect a significant number of taxpayers looking to claim ER especially those involved with a business over a short-term period. However, there had been suggestions that ER could have been abolished completely, which would have had a far wider impact on investors.
Whilst the draft legislation is unclear on the definitions for the new tests, it is hoped that the wording of the legislation will be improved, and that HMRC will issue guidance on how the new tests will work in practice. Bespoke will be contacting clients who could be affected by the changes in due course.