If you were hoping to get Entrepreneurs’ Tax Relief when you make a Capital Gain on business assets there are new rules coming in if you make a disposal after 5 April 2019. These could make a substantial difference to what you take home after a successful share sale.
The Ownership Period Lengthens
The ownership period to qualify, will rise from one to two years. So at present, a disposal of shares in a company trading from say 1 January 2018 could qualify if sold. From 6 April 2019 to 31 December 2019, they will not.
One key trigger here is when the business actually started to trade. This can be before any income is received, but it can’t start until mere preparations to trade have ended. If you are in a dilemma about this, contact us but it is essential to keep records of everything you do leading up to getting that first payment at your bank.
Not only that, the October 29th, 2018 Budget adds two new conditions immediately to change the definition of a “personal company”. This restricts relief to shareholders to those who have a genuine material stake (at least 5%) in the company.
To get back to basics, a claim to the relief on shares or business asset gains needs the company to be the taxpayer’s “personal company”. They must be an employee or officer of that company, or of another company in the same trading group.
So, what is a “Personal Company”, Then?
Under the old rules you must hold at least 5% of the ordinary share capital and you must hold at least 5% of the voting rights which are exercisable by virtue of that shareholding.
These rules will stay but now you must also have a right to at least 5% interest in the distributable profits and you must have a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.
Unfortunately the people responsible for writing this in to law have caused confusion that will be very difficult to match with what the Chancellor said in his statement. This is important because what the Chancellor intended needs also to be what the law actually says. The law trumps the Chancellor!
A New Government Amendment on Entrepreneur’s Relief
The Government has now made an amendment and this adds a much clearer alternative test for a “personal company” based on the shareholder’s entitlement to proceeds. In the event of a hypothetical sale of the whole company by asking if the shareholder is entitled to at least 5% of the proceeds in the event of the disposal of the whole company.
It assumes that the entire company is sold for its market value on the date of disposal of the shares/ assets which are the subject of the claim. This is important because in reality this is not what happens, quite often. This new test can be used instead of asking if you have a right to at least 5% interest in the distributable profits and a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.
This Already Applies to Disposals
Unfortunately if you made a disposal between 29 October 2018 and 20 December 2018 you must still apply the criteria: “Do I have a right to at least 5% interest in the distributable profits and a right to at least 5% of the net assets due to the equity holders on a winding-up of the company?”
Those who have built up their own company by way of ordinary shares with full voting rights and full rights on a winding-up should not be affected.
Employees who have acquired shares through employee share schemes, particularly EMI shares, may find they have suddenly lost their right to entrepreneurs’ relief, as employee shares tend to be issued with restricted rights, though not always.
Restricted rights often apply to directors and managers taking shares from a management buyout because often the financiers of the deal will have a different class of shares.
If uncertainty remains, then let’s talk about it. Simply pick up the phone and speak to the Maven Team on 023 8061 4404 or contact us via the website and we can help you navigate any uncertainty.