Entrepreneurs’ relief – changes made by Finance Act 2019
Finance Act 2019 made a number of changes to entrepreneurs’ relief. While some individuals may benefit from the changes, generally the conditions for relief have been tightened, and it will be more complicated for people to work out whether relief is available at all.
Here we provide a general overview of the changes. For an overall introduction to entrepreneurs’ relief, please use the button above to download our entrepreneurs’ relief flyer.
Qualifying holding period
With effect for disposals made on or after 6 April 2019 (subject to transitional rules), the qualifying holding period has changed from 12 to 24 months. The qualifying holding period is the period ending with the date of disposal or cessation of the business throughout which the qualifying conditions must generally be met.
Personal company condition
For disposals on or after 29 October 2018 (in most cases), the “personal company” condition has been tightened to better target relief at shareholders who genuinely hold a 5% economic interest in the shares. Prior to the introduction of the new tests to meet this condition, shareholders had to hold 5% of the ordinary share capital and voting rights.
Finance Act 2019 introduces two new further tests. In addition to the original test, shareholders must also now be beneficially entitled, by virtue of their shareholdings, to either or both of the following:
- 5% or more of distributable profits and 5% or more of distributable assets available for distribution to equity holders on a winding up of the company
- 5% or more of the notional sale proceeds if all of the shares had been sold on the date of the disposal.
We anticipate that the new tests will make it more difficult to ascertain whether entrepreneurs’ relief is available to shareholders. Some potential issues include:
- For the distributable profits / assets tests, valuing the shares over the duration of the 24-month holding period to ensure that the test is met throughout that entire period may be complicated. This may be the case particularly where there are complex share structures, for instance involving alphabet shares or varying rights to dividends and assets on winding up.
- Valuing shares for the new notional sales proceeds test where the notional sale consideration would include earn-outs.
- Ensuring that all entitlements of ‘equity holders’ are taken into account – this may be complicated for instance where there are venture capital or other institutional finance provider loans.
A positive change is the introduction of new rules giving shareholders the ability to make claims for entrepreneurs’ relief even when their (otherwise qualifying) shareholding has fallen below 5% as a result of dilution by other incoming shareholders. However, this only applies where the dilution has occurred as a result of an issue of new shares for cash on a commercial basis.
Shareholders must elect for the new treatment to apply. Two elections are available; firstly to crystallise the gain with the benefit of entrepreneurs’ relief, and secondly to defer the frozen gain until the eventual disposal of the shares. We can advise on whether this treatment may be available and if so, on how to make best use of the two available elections.
Contact our expert team for further information on entrepreneurs’ relief.