Q: I understand that the Budget delivered on 29th October proposed some changes regarding Entrepreneurs’ Relief. Can you expand on the proposals, please?
Three adjustments to the legislation about Entrepreneurs’ Relief are proposed.
The first affects the definition of a personal company. This will apply where the disposal is of shares in a trading company or the holding company of a trading group. One of the requirements is that the company is the individual’s personal company. The definition of a personal company will be expanded to add a requirement that the shareholder must have a 5% interest in the distributable profits and net assets of the company for the relief to be available.
This is in addition to the existing requirements that the shareholder holds at least 5% of the share capital and that shareholding entitles them to at least 5% of the voting rights and that the individual is an employee or office holder of the company.
This change will apply to disposals on or after 29th October 2018.
The second change will be that the qualifying conditions in all cases must be met for 2 years to the point of disposal or the cessation of trade. The previous rule allowed a 1-year qualifying period.
This is to apply to disposals on or after 6th April 2019. However, an element of protection has been put in place where businesses ceased prior to 29th October 2018. The 1-year qualifying period will be preserved.
The third change will apply where a shareholding is diluted to fall below 5% where, prior to the dilution, the shareholding was greater than 5%. This will be subject to a genuine commercial reasons test. This would exclude, for example, debt for equity swaps or the exercise of employee share options.
Entrepreneur’s Relief would be retained on the growth in the shares up to the point of dilution. A deemed disposal will arise. However, it will be possible for the shareholder to elect for the notional gain to be deferred until the shares are actually sold.
This will apply in respect of shares held at the time of fundraising events on or after 6th April 2019.
This is based on Budget proposals and will not be Law until the 2018-19 Finance Bill is enacted. It is, of course, possible that the proposals and legislation could be amended during the passage of the Finance Bill through Parliament.
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