Entrepreneur’s Relief: An Update
The past year has seen many significant changes to the capital gains tax (CGT) rules applying to Entrepreneur’s Relief (ER). This article summarises those key changes. There is not scope to provide details of the basic ER rules here and so knowledge of these is assumed, although the article includes a brief introduction to them. Legislation implementing the changes is contained in Finance Act 2015.
At its simplest, ER operates to tax qualifying capital gains at 10% as opposed to the usual CGT rates of 18/28%. It applies where the asset being disposed of is either an interest in a qualifying business, which can include shares in a trading company, or an asset owned personally that is used in a qualifying business and whose disposal is ‘associated’ with the disposal of an interest in that qualifying business.
2014 Autumn Statement
Planning had been to incorporate a business and, as part of the incorporation, sell the goodwill to the company in exchange for a loan account. ER gave a CGT rate of just 10%, and the loan could then be repaid tax-free, ie without the normal taxation associated with drawing a salary or a dividend.
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With effect from 3 December 2014, ER has not been available on the sale of the goodwill or other intangibles on incorporation in cases where the transferor (or any of their associates) have shares in the company and the company is ‘close’. As a result the usual rates of CGT apply.
Other chargeable assets which are transferred into the company as part of the incorporation can however still qualify for ER.
March 2015 Budget
Joint venture companies
Prior to 18 March 2015, ER could apply on the disposal of shares in joint-venture companies (including on liquidation) where that company in turn owned shares in a trading company. Such a structure was commonly used by members of management teams whose shares in the trading company would not have met the 5% shareholding condition. By owning 5% or more of the shares in the joint venture company, they could benefit from ER on a sale/liquidation of that company.
A joint venture structure is also commonly used for property development projects.
New rules apply to disposals on or after 18 March 2015 so that ER will not apply on gains realised on shares which do not give the shareholder at least a 5% stake directly in the trading company. The exception to this is where the shares held are in a ‘holding company’ (as defined).
Where ER is sought on the disposal of a personally owned asset used in the business, the disposal of that asset must be ‘associated’ with the disposal of part or all of the vendor’s interest in the business itself. It was commonly accepted that this interest could be as little as a 1%.
For disposals on or after 18 March 2015, the vendor needs to dispose of at least a 5% shareholding in the company or a 5% interest in the partnership’s assets if ER is to apply to the gain on the asset. No definition is provided of ‘partnership assets’.
This brief article provides just a summary of the recent key changes. At its simplest, Entrepreneur’s Relief is a simple, straightforward relief, however as can be seen, securing it in the real commercial world becomes complex relatively quickly. It often requires planning well ahead of a transaction because the necessary conditions have to be met for at least a 12 month period.
Great care should always be exercised, and nothing taken for granted.
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