Budget 2018: Changes to entrepreneurs relief
There was a moment in the budget last Monday when I would imagine owner-managers held their breath when the Chancellor said that he had been lobbied to scrap ER. Fortunately, the Chancellor believes in supporting entrepreneurial activity and ER has been retained, albeit with a few changes which the government states will ensure that "allowable claims are limited to those which are in the spirit of the relief" (Overview of Tax Legislation and Rates, 29 October 2018).
There are two crucial changes to the ER regime:
- The individual must be beneficially entitled to at least:
- 5% of the company's distributable reserves; and
- 5% of its assets available for distribution to equity holders in a winding up.
These new requirements are added to the existing requirements to hold at least 5% of share capital and carry at least 5% of voting rights and they are effective for disposals on or after 29 October 2018.
- The minimum qualifying period throughout which the conditions for ER relief must have existed is extended to 2 years. This change is based on the view that a "longer-term involvement is more characteristic of true entrepreneurial activity" (Overview of Tax Legislation and Rates, 29 October 2018). This change is effective for disposals taking place after 6 April 2019.
The effect is that, on 30 October 2018, if an owner-manager or investor holds shares that do not entitle them to 5% of the dividends and 5% of the assets available for distribution on winding up, those shares no longer qualify for ER. Going forward, shareholders and their advisors will need to look at shareholdings on a case by case basis to assess the application of the new requirements. We recommend that this exercise commences sooner rather than later because where share rights are adjusted to bring them into line with the new requirements, the holding period will re-start from the date of that adjustment. Government did not see fit to include any grandfathering clauses in the new requirements.
On the 30th October 2018, where shares do fulfil the new requirements but the holding period commenced after 6 April 2017, shareholders will need to dispose of them before 6 April 2019 (having held them for at least one year) in order to benefit from the delay in the implementation of the new holding period of two years. If they are still held at 6 April 2019, they will not then qualify for ER on disposal until they have been held for 2 years. For example, qualifying shares acquired on 1 January 2018 will attract ER on disposal between 1 January 2019 and 5 April 2019, but will not attract ER if disposed of between 6 April 2019 and 31 December 2019.
For holders of EMI options, the holding period also moves to two years for options exercised as from 6 April 2019 and means, from a planning point of view, that consideration must be given to a two year gap before options are exercised in an exit scenario. Note that the new 5% rules do not apply to EMI options as these tests are not a requirement for valid EMI options.