Restricting entrepreneurs’ relief

The qualifying conditions for entrepreneurs’ relief (ER) have been tightened up and further changes will take effect in April 2019.

ER is given to individuals who dispose of all or part of a business, including shares in a personal company. Where a disposal qualifies for relief, up to £10 million of lifetime chargeable gains are taxed at a reduced rate of 10%. For disposals from 29 October, two new tests have been added.

Conditions and timing

Investors must now be a director or employee of the company, hold at least 5% of its ordinary share capital and associated voting rights, be beneficially entitled to 5% of the company’s distributable profits and also 5% of its distributed assets in a winding up.

The additional profits and assets conditions may affect employees acquiring shares through enterprise management incentives (EMI), as these shares are often issued with restricted rights. However, an alternative condition, based on 5% of expected sale proceeds, was added to the Finance Bill in December.

Currently investors must meet the ER conditions throughout the 12 months up to the date of disposal, or the last day of trading if the business has ceased. But for disposals taking place after 5 April 2019, except where a business ceased before 29 October 2018, the minimum qualifying period increases to two years.

Another revision will benefit individuals who transfer a business to a personal company in exchange for shares. For disposals after 5 April 2019, the period of ownership before the transfer counts towards the two-year qualifying period.

Help is also provided for individual investors whose shareholdings are diluted to below the 5% qualifying threshold as a result of a fundraising issue of new shares after 5 April 2019. They will now be able to obtain relief for gains up to the dilution date.

We can help explain how you may be affected.