Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
The Chancellor’s budget announced on 11th March 2020 included a reduction in Entrepreneurs Relief. The relief has been significantly curtailed by reducing the lifetime limit for qualifying gains from £10m to £1m (being the level it was originally set at when it was first introduced in 2008). This measure will take effect for disposals qualifying for Entrepreneurs’ Relief made on or after 11th March 2020.
There had been speculation that Entrepreneurs’ Relief would be abolished completely. The Government published a Policy Paper entitled “Capital gains tax entrepreneurs relief reduction in the lifetime limit” on 11th March 2020. You can find it on the Government website at https://www.gov.uk/government/publications/change-to-the-entrepreneurs-relief-lifetime-limit-for-capital-gains-tax/capital-gains-tax-entrepreneurs-relief-reduction-in-the-lifetime-limit--2
What is Entrepreneurs Relief?
Entrepreneurs’ Relief allows business owners to benefit from a reduced rate of Capital Gains Tax when disposing of all or part of their business provided that the relevant conditions are met. The reduced rate is 10%.
The current law relating to Entrepreneurs’ Relief is set out in the Taxation of Chargeable Gains Act 1992 (sections 169H to 169V and Schedules 5B and 7ZA). Section 169N provides that Entrepreneurs’ Relief is available subject to a maximum lifetime limit of £10m per individual.
Legislation will be introduced in the Finance Bill 2020 reducing the Entrepreneurs’ Relief lifetime limit to a maximum of £1 million. The rules will also provide that the lifetime limit must take into account the value of Entrepreneurs’ Relief claimed in respect of qualifying gains in the past.
Anti-forestalling provisions will be introduced, which may apply the new £1m limit to arrangements entered into before 11th March 2020. These include provisions relating to pre-budget unconditional contracts and share-for-share exchanges:
(a) Pre-budget unconditional contracts
If an unconditional contract was entered into prior to 11th March 2020, but the transfer does not take place prior to 11th March 2020, the actual transfer date will be treated as the disposal date. This rule will apply unless (i) the parties to the contract demonstrate that they did not enter into the contract for the purpose of obtaining a tax advantage by reason of the timing rule in section 28 of the Taxation of Chargeable Gains Act 1992, and (ii) where the parties to the contract are connected, that the contract was entered into for wholly commercial reasons.
(b) Share-for-share exchanges
This rule applies whether or not the aim of the transaction was to achieve a tax advantage. The general rule in relation to share-for-share exchanges is that they are not treated as disposals for capital gains purposes. However, it is possible to make an election to opt out of this treatment in order to crystallise a gain and claim Entrepreneurs’ Relief.
Where the election is made on or after 11th March 2020, the new rules provide that the date of disposal will be deemed to be the date the election is made (meaning the £1m lifetime limit will apply) rather than when the share exchange took place. However, this will only apply if (i) both companies are owned or controlled by substantially the same persons, or (ii) persons who held shares in company A hold a greater percentage of shares in company B than they did in company A and, on 11 March 2020, the personal company test, the trading company and the employee/officer test are met in respect of company B.
Taxpayers will be able to seek clearance from HMRC if they are uncertain about whether the anti-forestalling provisions apply to them.
The changes to Entrepreneurs’ Relief may have a significant impact on the tax position of business owners and, in particular, serial entrepreneurs. Those who have either (i) already entered into a Sale Agreement which has not yet completed, or (ii) undertaken a share-for-share exchange in the current tax year, may wish to review their options. They should seek advice on how the changes to Entrepreneurs’ Relief (and, in particular, anti-forestalling provisions) may affect them.
If you would like to discuss an existing or proposed transaction, please contact us. We can help you to plan and prepare for the process and help you carry out your transaction in a way that is right for you and your company.
If you would like more information about Entrepreneurs’ Relief and its effect on your transactions or would like to discuss a potential or existing Sale Agreement, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
