Entrepreneurs’ relief (‘ER’) reduces the amount of capital gains tax paid on disposals of businesses and shares in personal companies to 10%. In order to qualify for entrepreneurs’ relief, individuals must meet certain conditions within a period of 12 months, ending with the date of disposal or cessation of the business followed by a disposal within three years.
For these rules, personal company in relation to an individual means a company in which–
a) At least 5% of the ordinary share capital is held by the individual, and
b) At least 5% of the voting rights are exercisable by the individual by virtue of that holding.
With effect for disposals made on or after 6 April 2019, individuals will need to meet the qualifying conditions for ER for a minimum period of two years rather than one. In essence this means that:
- Where an individual has disposed of an asset used at the time the business ceased, the business must have been carried on by the individual for two years;
- Where shares are sold, the qualifying conditions in relation to companies must have been met for two years ending at the time of disposal;
- Where an individual has disposed of an asset used in the business (associated disposal), that asset must have been used in the business for two years;
- The qualifying conditions in relation to trust business assets must have been met for two years.
Transitional rules will apply where the individual’s business ceased before 29 October 2018, so that the one-year period will continue to apply to claims on disposals of assets within three years of cessation.
In relation to the definition of a personal company, two new tests have been added with effect from 29 October 2018 requiring the individual to have a 5% interest in both distributable profits and the net assets of the company.
The changes announced are aimed at ensuring the valuable relief is restricted to claimants who have a true material stake in the business held over a longer period of time. Those involved in longer term trading businesses should not be overly affected but these changes but they will not be welcomed by those involved in more short term speculative ventures.