The Chancellor has confirmed the valuable capital gains tax Entrepreneurs’ Relief (ER) is here to stay, but has extended the qualifying period from one year to two years to support longer term business investment. There will be special rules to preserve relief for businesses which ceased before Budget Day (29 October 2018).
ER provides a 10 per cent rate of tax for individuals selling qualifying business assets – for example shares in their personal trading company. Currently, the conditions must be met for one year prior to a sale for the relief to apply - the Chancellor has increased this period to two years, effective from 6 April 2019.
There have also been changes to the qualifying conditions which apply from today. The changes are designed to counteract an 'identified abuse' whereby shareholders can qualify for tax relief by virtue of shares which have no real economic value – a structure commonly used in private equity backed companies. Shareholders will have to be entitled to 5 per cent of the distributable profits and net assets of the company during the qualifying period not just 5 per cent of the ordinary share capital and voting rights as is currently the case.
Given speculation about the potential abolishment of ER, or a reduction to the lifetime limit of £10m, these less aggressive changes to the relief are overall good news. These measures will ensure that the relief continues to benefit genuine entrepreneurs at the current level, and is unlikely to impact the majority of business owners.
Given the longer qualifying period it is important that individuals holding business assets take advice at an early stage to ensure that they qualify for ER.
In view of the changes to the 5 per cent condition, individuals holding shares which have previously been structured to qualify for ER (often in Private Equity backed businesses) should urgently review their position, as their shares may no longer qualify for relief.