The recent budget has announced changes to the conditions relating to the availability of Entrepreneurs Relief.
Draft legislation has been published but it is possible that the final legislation will differ from the drafts currently circulating.
Entrepreneurs Relief has the effect of reducing the amount of Capital Gains Tax paid on disposals of businesses, or shares in a personal company, to 10% on up to £10 million worth of lifetime gains.
Holding Period for the Relief
In order to successfully claim this Relief, claimants on a disposal of a business or shares in a personal company have had to show that they carried on that business or held those shares for at least 1 year ending with the time of the disposal.
The budget of November this year has increased that period to 2 years.
When does this come into effect?
This affects disposals on and after 6 April 2019. If you have held the shares or business for over 1 year but less than 2 you will be entitled to relief as long as you COMPLETE the disposal prior to 6 April 2019.
Additional Conditions attaching to “Personal Companies”
Currently the conditions for a company to be treated as a personal company to provide Entrepreneurs Relief are:-
· That the Claimant holds at least 5 per cent of the company’s ordinary share capital; and
· Those shares carry at least 5 per cent of the voting rights in the company throughout the qualifying period (1 year now, 2 years after 5 April 2019).
New additional conditions
The budget has announced that there are to be 2 new tests to the definition of a ‘personal company’.
These are that the Claimant must have a 5% interest in both the distributable profits and the net assets of the company.
The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be due.
It is worth noting that it is 5% of distributable profits not 5% of the total profits of the company.
Issues to Consider
It is not unusual for the rights in shares granted to directors and employees in personal companies to carry only discretionary rights to participate in distributable profits. Such discretionary rights will not meet the new tests.
Consideration needs to be given to any shares which are subject to liquidation preferences which do not entitle the holder to at least 5% of the assets of the company available for distribution to equity shareholders on a winding up of the company.
Consequently companies should review their shareholdings for directors and employees which are above 5% of the equity to ensure that these shares will meet the 2 new conditions.