For some time, the government has considered that Entrepreneurs’ Relief is expensive, ineffective and unfair.
Consequently, many expected the Chancellor to announce the abolition of the relief in the Spring Budget on 11 March 2020. Instead, the Chancellor announced an immediate reduction in the lifetime limit (from £10 million to £1 million) but with anti-forestalling measures applying to certain disposals. The government estimates that these changes will save around £6 billion over the next five years.
The Budget resolution and draft legislation to effect the changes have now been published. As well as the expected changes, the draft legislation effects a name change - Entrepreneurs’ Relief is now Business Asset Disposal Relief - no doubt to better reflect the nature of the relief.
So what are the key reforms and how will they affect you?
As expected, the draft legislation applies the £1 million lifetime limit to disposals made under two common techniques intended to “lock-in” the pre-11 March Entrepreneurs’ Relief rules: unconditional contracts and share-for-share exchanges.
Specifically, the £1 million lifetime limit applies to disposals made under unconditional contracts that were exchanged but did not complete before 11 March 2020 unless a claim is made confirming that:
The claim is made alongside the normal claim for Entrepreneurs’ Relief in the “white space” in the tax return or as a separate attachment.
Likewise, the £1 million lifetime limit applies to certain share-for-share exchanges or share reorganisations that occurred between 6 April 2019 and 11 March 2020 where an Entrepreneurs’ Relief “section 169Q” election is made on or after 11 March 2020 to trigger a disposal. Where such an election is made, the disposal is treated as taking place at the time of the election rather than, as was previously the case, at the time of the share-for-share exchange.
It is possible that if clearance for the share-for-share (that the transaction is for bona fide commercial reasons and not to avoid a capital gains liability) was not sought or sought but not granted by HMRC, the original exchange was a disposal for capital gains tax purposes such that the £10 million lifetime allowance could apply. However, if such a clearance was sought and granted, that treatment is not possible.
Taxpayers disadvantaged by the reduction in the Entrepreneurs’ Relief lifetime limit may wish to consider and seek advice on whether a full-market value sale to an employee-ownership trust (EOT) might be a suitable exit. There will, of course, be effort and cost involved in establishing the EOT and, not least, financing the trust to purchase the shares. However, qualifying disposals to an EOT are treated as taking place on a “no gain no loss” basis, effectively offering exiting shareholders 20% Capital Gains Tax relief.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.