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New law: Business owners review their plans as Chancellor changes the Entrepreneurs’ Relief rules

Individuals planning to rely on Entrepreneurs’ Relief to reduce the rate of Capital Gains Tax (CGT) payable when they dispose of their businesses should review those plans, as the Chancellor has reduced the lifetime limit on the gain for which an individual can claim the relief from £10m to £1m.

Entrepreneurs’ Relief reduces the rate of CGT payable by individual directors and employees on a ‘material disposal’ (or a disposal ‘associated’ with a material disposal) of their ‘qualifying’ ordinary company shares to 10 per cent, provided certain conditions are met. The relief also applies if they meet these conditions in relation to a holding company of a trading group. This is a valuable benefit to entrepreneurs selling off companies they have built up over years.

Before the Budget there was a lifetime limit of £10m on the gains for which any individual could benefit from Entrepreneurs’ Relief. Any relevant gains above that limit were taxed at usual CGT rates.

For disposals on or after 11 March 2020, that lifetime limit has been slashed to £1m. There are no transitional rules to ease the new rules in – they apply immediately.

This means that entrepreneurs who have already benefited from Entrepreneurs’ Relief on gains of £1m (or more) will not be entitled to relief on any further gains. Those who have not yet claimed relief at all, or have claimed in relation to less than £1m of gains, will only be able to claim it on the balance.

There are also ‘anti-forestalling’ rules designed to stop schemes working which were set up before the budget, in anticipation of the relief being abolished or varied. For example, disposals which were agreed but not completed before 11 March, or which were associated with a ‘share for share exchange’ (where a shareholder in company A disposes of their shares to company B in return for an issue of shares in company B) may not be eligible for Entrepreneurs’ Relief, depending on the circumstances.

HM Revenue & Customs plans to offer a (non-statutory) service whereby it will confirm whether the new rules – particularly, the anti-forestalling rules – apply.

Entrepreneurs’ Relief can also reduce the CGT payable on gains made on disposals of shares acquired by exercising options under an Enterprise Management Incentive (EMI) scheme – a tax-efficient incentive plan for qualifying companies and employees – provided certain conditions are met. For most EMI scheme members, gains from such disposals are likely to be within the new £1m lifetime limit, so very few will be disadvantaged by the change.

The government has also announced that it intends to review the EMI rules generally, with a view to allowing more companies to benefit from them.

Operative date

  • Now

Recommendation

  • Individuals planning to rely on Entrepreneurs’ Relief to reduce the rate of CGT payable on disposal of their businesses should review those plans, as the Chancellor has reduced the lifetime limit on the capital gain for which an individual can claim the relief from £10m to £1m.

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