At McDade Roberts accountants we work with hundreds of entrepreneurs. We have therefore been very interested to see how the changes in the 2018 Budget set out by the Chancellor will affect our clients.
What Are The Changes To Entrepreneurs Relief?
The good news was that Entrepreneur's Relief (ER) survived despite fears it may be cut completely. If you were to sell your business or shares in a company that runs a business, and meet the conditions for ER, any capital gain you make, up to £10 million, is taxed at just 10%. The conditions however to claim have become more difficult.
These changes are:
- Definition of what counts as a qualifying “personal company”
- The period of ownership required for the business or shares to qualify for ER changes from one year to two years.
- A change to how ER is assessed if there has been a dilution of shares when a company gains extra funding.
Entrepreneur's Relief Change 1
Currently to be your personal company you must own at least 5% of its share capital and have at least 5% of the voting rights. Plus, you must be an office holder, e.g. a director or an employee, of the company. From Budget day 29 October 2018 you must also have the right to at least 5% of the company's distributable profits, typically paid as dividends, and 5% of its net assets if it is wound up.
Different rules apply to shares issued through an enterprise management incentive scheme. These aren't affected by the Budget changes.
Entrepreneur's Relief Change 2
This rule applies to gains made on or after 6 April 2019, but if your business ceased before Budget day, but you don't sell it until on or after 6 April 2019, the one-year qualifying period still applies.
Entrepreneur's Relief Change 3
One current problem with ER is that you could lose the right to it if the company issues more shares. For example, say you bought 5% of a company's share capital soon after it was set up, but a couple of years later it needs cash and so issues more shares to new investors. Your shareholding will drop below the magic 5% as a result and you'll lose access to ER.
In future, if your shareholding becomes diluted to below 5% when the company obtains extra funding for genuine business reasons, you won't automatically lose your right to ER. So long as you met the 5% condition before the extra funding, you'll get ER up to the time the new investment caused your shareholding to drop to less than 5%. HMRC will deem you to have sold your shares and immediately repurchased them before the new shares were issued. You will be entitled to claim ER if the deemed sale results in a gain.
Confused about Entrepreneur's Relief?
Still got questions? No problem. Give is a call and we will be happy to have a confidential chat to see if we can help you make the most out of Entrepreneur's Relief.