Apart from its name, what else has changed with regards to entrepreneurs’ relief?
Since its introduction in 2008, the lifetime limit for entrepreneurs' relief had steadily increased to £10m until 10 March 2020.
However, at Budget 2020 the Chancellor announced two major changes:
a new name: business assets disposal relief (effective in tax year 2020-21 onwards) on which you’ll pay tax at 10% on all qualifying assets
a reduction in the lifetime limit from £10m to £1m.
Date of disposal:
Lifetime limit £
From 6 April 2008 - 5 April 2010
From 6 April 2010 - 22 June 2010
From 23 June 2010 - 5 April 2011
From 6 April 2011 - 10 March 2020
From 11 March 2020
The current legislation on Entrepreneurs’ Relief is found within Part 5, Chapters 3, 3A and 4 of Taxation of Chargeable Gains Act 1992 (TCGA 1992) sections 169H to 169V. The legislative detail for the above changes will be introduced in Finance Bill 2020.
It has been announced that the Finance Bill will also provide that the lifetime limit must take into account the value of Entrepreneurs’ Relief claimed in respect of qualifying gains in the past. Therefore, any entrepreneurs who have already claimed this relief on past business disposals for gains in excess of £1m will no longer have access to this relief. It is anticipated that the reduction will not affect 85% of the claimants.
The following disposals attract entrepreneurs' relief:
a disposal of the whole or part of a business owned by the individual throughout the two-year period ending with the date of disposal
associated disposals, ie a disposal of, or a disposal of an interest in, an asset in use for the purposes of a business, at the time at which a business ceases to be carried on, where the business was owned by the individual throughout the two-year period ending with the cessation of the business. The disposal must be made within the three-year period beginning with the date of cessation, provided that the asset has not been used for any purpose, other than that of the business, during the intervening three-year period
a disposal of, or a disposal of an interest in, shares or 'securities' of a company, where the company is the individual's 'personal company' and is either a 'trading company' or the 'holding company of a trading group' and the individual is an officer or employee of the company; or, where the company is a member of a trading group, of one or more companies which are members of the group. For all disposals with effect from 6 April 2019, these conditions must be satisfied throughout either:
the two-year period ending with the date of disposal (one year for disposals prior to 6 April 2019), or
the two-year period (one year for disposals prior to 6 April 2019) ending with the date on which the company ceases to be a trading company without continuing to be or becoming a member of a trading group or ceases to be a member of a trading group without continuing to be or becoming a trading company. In this case, the disposal must be made within the three-year period beginning with the date of cessation.
An individual's personal company is a company in which they hold at least 5% of the ordinary share capital, in which they are able to exercise at least 5% of the voting rights by virtue of that holding and must have 5% entitlement of profits that are available for distribution and assets on winding up the company or disposal proceeds if the company is sold.
Entrepreneurs’ relief planning points
Top up employee/director shareholdings to ensure they pass the 5% threshold
Fragment holdings within a family to maximise the relief available
Combine smaller holdings between family members so they can qualify
Entrepreneurs' relief may be claimed on any of the following events:
a normal sale
a transfer (for example, at undervalue)
company winding-up under ESC C16
company purchase of own shares (assuming that capital gains treatment applies)
where a capital sum is derived from the asset
incorporation of a business.
Watch out for cases where a company director or partner in a partnership owns a property and lets it to the company or partnership. If this property is sold, then to qualify for the relief, both of the following must apply:
you’ve sold at least 5% of your part of a business partnership or your shares in a personal company
you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares - or the date the business closed.