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Will March bring relief for entrepreneurs?

The dust may have settled on the general election but an election pledge for the review of entrepreneurs’ relief  (ER), in its current form, remains on the cards. As ER faces questions over its future, particularly criticism that the relief is being abused, we look at the current criteria of ER and tips for avoiding the potential pitfalls.

What is Entrepreneurs’ Relief?

ER reduces capital gains tax to 10% when disposing of a qualifying business asset (up to a lifetime limit of £10m per individual). The 2018 budget introduced 3 very important changes to the qualifying criteria.

First, the minimum period throughout which all the qualifying conditions must be satisfied increased from 12 months to 24 months from 6 April 2019. Therefore:

  • The person disposing of the asset/s must also be an officer/employee of the company for at least the 24 months prior to the disposal.
  • The company must have traded in the 24 months prior to the disposal.

To qualify for ER on the disposal of shares, an individual has to own at least 5% of the ordinary share capital and 5% of the voting rights. The second change was to refine this rule by adding economic interest measures requiring the taxpayer to have beneficial entitlement to:

  1. at least 5% of the profits available for distribution to equity holders and, on a winding up, at least 5% of available assets; or
  2. at least 5% of the proceeds in the event of a disposal of the whole of the ordinary share capital.

Potential Pitfalls

The test at point 2 above operates differently from the other tests in that if the conditions are met on the disposal date, it is treated as being satisfied for the previous 24 months. This is easier to prove than point 1, so one would typically only consider point 1 if point 2 is not applicable.

The reference to equity holders in point 1 is a much wider definition than shareholders. Non-commercial loans and preference shares can fall within this definition. This can therefore dilute dramatically the shareholdings of an ordinary shareholder so that if they continue to have 5% of the ordinary shares, they no longer qualify for ER.

Particular care should be taken with regard to preference shares. In the recent case Warshaw v HMRC, ordinary share capital was found to include preference shares with a cumulative dividend calculated as a percentage of an amount that was not fixed or capped.

It should also be noted that consideration is given to all circumstances surrounding the shares, therefore it is important to carefully examine the company’s articles of association and shareholder agreement fully.

What are the potential incoming changes?

Whilst the abolishment of ER is not being proposed, the Conservatives have pledged to ‘review and reform’ the relief. Any changes won’t be known until the March budget.

Therefore, if you have exit plans or share schemes completing in the near future which qualify for the relief, it would be strongly advised that you take expert advice now to try to ensure this benefit is preserved.

To discuss any of the issues raised in the above article, please contact a member of our Corporate and Commercial Team on 01737 854 500. 


Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.

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