Finance Bill 2016 – ER changes

Finance Bill 2016 – Entrepreneurs’ relief changes

Finance Act 2015 introduced some restrictive changes to entrepreneurs’ relief (“ER”) which focused on three aspects:

  • Associated disposals;
  • Goodwill on incorporation;
  • Joint venture structures

The changes were intended to prevent the relief being claimed via contrived structures or where there was no “meaningful withdrawal” from a business but they also adversely affected claims for relief in the succession of family businesses and some genuinely commercial JV structures.

The government have bowed to pressure and acknowledge that the 2015 changes caught certain transactions which were never intended to be caught and Finance Bill 2016 includes provisions, all of which are backdated, so that they take effect from the date the original 2015 changes were introduced. The new provisions are complex, particularly in relation to JV structures and do not constitute a complete reversal to the pre FA 2015 era. A summary of the changes is as follows:

Associated disposals

The changes will now allow a person who wants to pass on their business to a family member as part of a pre-planned family succession to also, at the same time, dispose of privately held assets, used in the business and claim ER on both the material and associated disposal. The 5% test introduced in FA 2015 will also be removed for partners who own less than 5% but decide to dispose of the whole of their interest and at the same time an asset held privately. As long as the partner has held a 5% interest continuously for three out of the last eight years, before the date of disposal, relief for the associated disposal can be claimed. These changes will be welcomed by those wishing to pass on the business to family members or looking to retire and sell their privately held assets previously used in the business.

Goodwill on incorporation

FB 2016 will make amendments allowing ER to be claimed in respect of transfers of goodwill to a close company where the transferor along with a relevant connected person holds less than 5% of the shares and votes. Relevant connected person does not include family members thus allowing a sale of goodwill as part of a normal family succession to be eligible for ER.

Relief can also be claimed where a person is required to incorporate before a sale to third parties as long as the shares in the newly incorporated company are sold within 28 days. This is quite a short timeframe but can be extended by HMRC Board Approval.

Joint ventures and partnerships

The definition of a trading company/group has been updated for ER purposes where the shares are held in a company which has an interest in a joint venture company or partnership. Where the new definitions apply, ER will be extended where the person holds at least

  • a 5% interest in shares and votes of a JVC; or
  • a 5% interest of partnership profits or assets and who controls 5% of the voting rights.

The individual’s interests are measured directly and indirectly via various formulae which could mean that depending on the percentage of shares and votes held some shareholders of a company could qualify for ER and others might not.

Although not a complete reversal these changes will ensure that some commercially driven JV structures will now be efficient from an ER perspective and will provide certainty to others looking to enter into such arrangements.

For further information on these latest changes, please contact the TaxDesk on 0845 4900 509 and ask for Martin Mann.