Changes to entrepreneurs relief

As anticipated entrepreneurs’ relief (ER) was in the firing line for the Chancellor as the lifetime limit for qualifying gains was cut from £10m to £1m effective from Budget day. Whilst the cut is more severe than expected, the decision to retain ER is welcomed as it recognises the contribution of entrepreneurs to the economy and the financial risk that they take. HMRC say that 80 per cent of individuals who qualify for ER should be unaffected by the change. 

What was not anticipated are the anti-forestalling measures designed to catch individuals who entered into certain arrangements to bank tax relief ahead of Budget day. The new measures are aimed at transactions which were designed to bring forward a tax charge to circumvent any Budget day changes, and which lack commercial substance. Often these are transactions where the parties involved are connected, or there is no real change in ownership or control. 

The first measure targets individuals who have entered into arrangements using ‘unconditional contracts’ to bring forward the date of a sale which has not yet completed. Individuals will need to submit an additional ER claim and demonstrate that the purpose of the transaction was for commercial reasons, and not to gain a tax advantage if they wish to claim the higher lifetime limit. In all other cases the new £1m limit will apply. 

There are specific measures relating to reorganisations involving share for share exchanges which have taken place between 6 April and Budget day. Ordinarily if conditions are met, an exchange of shares in one company for shares in another company is not treated as a disposal for capital gains tax. Instead, the new shares are treated as ’standing in the shoes’ of the original shares. However, under ER rules, an individual can make an election to disapply this treatment to enable a claim for ER. Ordinarily, the timing of the tax charge is the date of the share exchange, and not the later date that the election is made. Depending on the circumstances of the transaction, making an election now may crystallise a tax charge under the new rules. It will be essential for anyone who has undergone a share for share exchange since 6 April 2019 to take advice before making an election with the expectation of claiming ER. 

In contrast to the restrictions on ER, investors’ relief which also provides a 10 per cent rate of capital gains tax remains unchanged with a lifetime limit of £10m. The cost of this relief cannot yet be quantified as it was only introduced in 2016 and with a three-year qualifying period, the first sales which qualify for relief are only being seen now. 

Given the need to raise funds for this ‘spending’ Budget, it is no surprise that ER has been heavily curtailed. What is interesting is the strong message that has been delivered via the additional measures introduced today. There seems to be an increasing move towards the view that tax planning should always be commercially driven and arrangements that are purely tax driven are likely to come under significant scrutiny from HM Revenue & Customs. 

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Helen Relf Helen Relf