Budget 2018 - Significant restrictions to Entrepreneurs' Relief

Entrepreneurs' Relief is a capital gains tax relief, which reduces the capital gains tax rate to 10% on the first £10 million of gains which qualify for relief.

The relief is aimed at business owners and owners of shares in trading companies, who are also directors or employees of the company.

From 6 April 2019 the minimum period throughout which the qualifying conditions for relief need to be met will be extended from one year to two years.

Entrepreneurs' Relief - new qualifying conditions

Perhaps of more significance is the change to the qualifying conditions for those who are disposing of shares in a company where they have a shareholding of at least 5% and are employed or hold an office in the company.

From 29 October there will be two new conditions which have to be satisfied in connection with the shares. Up until 29 October it was necessary for the shareholding to represent at least 5% of the ordinary share capital and at least 5% of the voting right. From 29 October it will also be necessary for the shareholder to be beneficially entitled to at least

• 5% of the company's distributable profits
• 5% of the assets available for distribution to equity holders in a winding up

It should be noted that these tests will need to be satisfied for at least 2 years for disposals after 5 April 2019.

Where there is only one class of shares, these new tests are unlikely to present a problem. However, many companies have more than one class of share and in these situations it is possible that shares which would have previously qualified for Entrepreneurs' Relief will no longer do so.

The proposed legislation will exclude many shares which were issued in commercial circumstances, purely because there is a second class of shares which have either a prior right or a discretionary right to dividends.

Summary

It would appear that this legislation has not been thought through thoroughly and it could be amended before it is finalised. However, as the legislation will become effective from 29 October, any company which has more than one class of share should review whether or not they will be caught by the changes.

For help with Entrepreneurs' Relief or any other tax advice, please call me on 0113 398 1136 or email me at ptwhitehead@hwca.com

For the main tax changes in the Budget and comments on the more important changes, read our Budget Summary

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