Entrepreneurs’ relief reduces the rate of Capital Gains Tax payable on the disposal of certain business assets from 20% to 10% provided a number of conditions are met. In the Finance Act 2019 Parliament made changes to entrepreneurs’ relief in relation to disposals made after 5 April 2019.
Applying to all disposals
For disposals of any business asset made after 5 April 2019, the qualifying period is now 24 months (previously 12 months), which means individuals will need to own the asset for at least 24 months before they can claim entrepreneurs’ relief on its disposal.
Applying to disposals of shares
For a shareholding in a company to qualify for entrepreneurs’ relief, all of the following conditions must also apply throughout the qualifying period. The conditions, broadly, are:
- the company must be a trading company (or holding company of a trading group);
- the individual holds at least 5% of the ordinary share capital of a trading company (without including shares held by associates or shares held in another capacity, say, trustee);
- the individual can exercise at least 5% of the voting rights of the company which are associated with that ordinary share capital; and
- for disposals after 28 October 2018, the individual meets one or both of two economic interest tests:
- is beneficially entitled to at least 5% of the profits available for distribution to the equity holders and is entitled to at least 5% of the assets available for distribution to the equity holders on a winding up of the company; or
- on the assumption that the entire company is sold, the shareholder would reasonably be expected to receive at least 5% of the total disposal proceeds.
The valuation of the shares in economic interest test 4 b) is done using the market value of the shares, but no discount is applied for a minority shareholding. This is likely to be the preferred test where there is more than one class of shares.
The economic interest tests must take account of any arrangements in place during the qualifying period, but the effect of any tax avoidance arrangements is ignored when applying this rule.
Ordinary share capital
“Ordinary share capital” is defined as all of a company’s issued share capital, “except fixed dividend shares which have no other rights to share in the company’s profits”. This has caused problems in a few cases recently so if your company has more than one class of share it is worth checking the position.
Dilution – elections
Where an individual’s shareholding has fallen below 5% due to fundraising, the shareholder can capture the entrepreneurs’ relief which would otherwise be lost, by making one or both of two elections:
(a) claim the relief on a deemed sale and reacquisition at market value at the point immediately before the issue of the additional shares that removes the personal company qualification,
(b) defer taxation of the gain made on this deemed sale until the actual disposal of the shares.
Both of these elections must be made within the period for making or amending the tax return for the year of the deemed disposal, i.e. the first anniversary of 31 January following the tax year in which the additional shares are issued.
If you think you may qualify for entrepreneurs’ relief or would like to find out more about it, please contact Jill Springbett.
Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.