The Chancellor announced two key changes to Entrepreneurs’ Relief in today’s budget which will impact shareholders and business owners.
Entrepreneurs’ Relief reduces the rate of Capital Gains Tax on disposals of certain business assets from 20% to 10%.
Today’s Budget introduced two new additional tests to be met:
What does the 5% Rule mean?
The changes introduced in today’s Budget mean that along with existing conditions that an individual must hold at least 5% of the ordinary share capital and voting rights of a trading company, the individual must also be entitled to:
a) 5% of distributable profits and
b) 5% of assets available on a winding up of that company.
As previously announced, the Government confirmed that legislation will be implemented from 6th April 2019 in relation to individuals’ shareholdings diluted below 5% as a result of a commercial cash investment.
These individuals will be able to elect to preserve their Entrepreneurs’ Relief on gains to the date of dilution by treating their shareholding as having been disposed of and simultaneously reacquired at market value at the time of dilution. Another way of looking at this is, under the new rules, a shareholder can elect to claim Entrepreneurs’ Relief on the capital gains accrued before dilution below 5%. This is provided the dilution resulted from an issue of new shares for cash. The Entrepreneurs’ Relief will be claimed on the eventual disposal of those qualifying shares. There is, of course, the prerequisite that the share issue has not occurred for the purposes of tax avoidance.
There will also be an election allowing the individual to defer any tax due until a future liquidity event.
It is important to keep in mind that this provision will also not be available if the percentage entitlement falls below 5% due to a part-disposal of shares.
The changes to Entrepreneurs’ Relief introduced in today’s Budget will affect the availability of the relief on the sale of shares originally issued after the incorporation of a trade.
A transfer of a trade in exchange for shares in a trading company should benefit from Entrepreneurs’ Relief if the trade existed for at least two years prior to the date of incorporation.
Under the current regime the claimant was required to hold the resultant shares for at least two years prior to the date of disposal.
Therefore, this amendment to the Entrepreneurs’ Relief is deemed to benefit sole traders who incorporate the trade shortly before selling their business.
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