Entrepreneurs’ relief at risk?
Entrepreneurs’ Relief reduces the amount of Capital Gains Tax that certain shareholders pay when disposing of shares in qualifying companies. In short, where a person qualifies for Entrepreneurs’ Relief, they will only pay 10% capital gains tax on the sale of their shares. In order to qualify, a shareholder must hold at least 5% of the ordinary shares in the company (which must entitle him/her to at least 5% of the voting rights and 5% of the company’s distributable profits), must have been an officer or employee of the company for at least two years immediately prior to the disposal and the company must have been trading in the two years leading up to the disposal.
A number of changes were introduced to the regime in 2018 in order to ensure that the relief was more closely targeted to individuals who held a material stake in a business. These changes included extending the required holding period from one year to two years, and a requirement to hold the economic interest in at least 5% of the company’s value (as opposed to simply holding at least 5% of the company’s shares). However, despite these changes, the relief has continued to be heavily criticised.
In its recent election manifesto, the Conservative Party promised to review and reform Entrepreneurs’ Relief. In light of this, and recent soundings from Government, it appears likely that some form of amendment to the regime will be announced on 11 March when Rishi Sunak, the new UK Chancellor, announces his first budget. While it remains to be seen how the relief might be changed, it would not be unreasonable to assume that there will be a change to the effective rate of capital gains tax and/or to see some measures to more closely align the relief to encourage genuine entrepreneurship. Until the budget is announced, however, many business owners contemplating a sale will be waiting with bated breath…..
Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.