Entrepreneurs relief reduces the amount of Capital Gains Tax paid on the disposal of all or part of a business, or shares in a personal company. Qualifying gains are taxable at 10% up to £10 million worth of lifetime gains.
Sole traders and business partners who have owned the business for at least one year prior to the date of disposal are eligible for relief. Where an individual is closing a business, the business assets must be disposed of within three years of this date.
For the disposal of shares, the Autumn Budget 2018 introduced some changes to eligibility for the relief which came into effect for disposals after 28 October 2018. The minimum holding period was also increased to two years for disposals made on or after 6 April 2019. It is thought that these changes have been introduced to prevent exploitation of the relief.
Previously, to qualify for the relief, shareholders must have held shares in a personal company for at least 12 months before the date of disposal. A personal company is one in which the shareholder holds at least 5% of the ordinary share capital, and the shareholder is able to exercise 5% of the voting rights by virtue of their shareholding. Ordinary share capital excludes fixed rate preference shares.
Under the proposed changes, in addition to the personal company requirement and the conditions stated above, the shareholder must be beneficially entitled to 5% of the company’s distributable profits, and must also be beneficially entitled to 5% of the assets available for distribution to the equity holders on a winding up. Equity holders includes loan note holders and fixed rate preference shareholders.
Companies adopting a structure with different classes of shares in issue, commonly termed ‘alphabet’ shares, may be affected by this new legislation.
Unless the articles state that all shares rank equally for distributions or provide each share class with a right to a proportion of every dividend declared, no individual share class carries an absolute entitlement to at least 5% of the distributable profits.
Such companies will therefore need to review their articles to ensure that the availability of entrepreneurs’ relief is not prohibited. Any remedial changes will however trigger the beginning of a new qualifying period.
Crowthers offer a range of tax services associated with Capital Gains Tax and Inheritance Tax Planning. Details of these tax services can be found by visiting our Tax Planning page.