The Chancellor has announced changes to restrict Entrepreneurs Relief.
It was anticipated that the relief would be abolished entirely, but instead and more sensibly it has been restricted by reducing the lifetime allowance. These changes are brought in with immediate effect for transactions entered into on or after 11 March 2020 (Budget day). Furthermore, there are two anti-forestalling rules introduced to target situations where transactions ‘locked in’ before budget day to preserve the pre-budget day life time limit.
The current life time allowance before 11th March 2020 was to allow the first £10,000,000 of lifetime gains to be taxed at 10% providing the other conditions for Entrepreneurs Relief were satisfied. This has been reduced from 11 March 2020 to £1,000,000 which means that there is a potential tax reduction of £900,000 to the relief. This will also apply to employees that dispose of shares that have been acquired under a HMRC approved share scheme such as Enterprise Management incentives.
The changes are expected to affect 9,000 individuals with 17% of taxpayers being affected by the change and 58% of gains being made ineligible for Entrepreneurs’ Relief. This is bought into to tackle inequality in the application of the rules and ensure that genuine entrepreneurs can obtain the relief. As the relief has not been abolished it does leave open the opportunity for the limits to be changed (even extended) in future budget announcements, if the reduction was to be considered excessive.
If the tax payer has previously claimed relief for Entrepreneurs Relief, then these will be taken into account for post 11 March 2020 disposals. As such, if more than £1,000,000 has been claimed prior to 11 March 2020, then no relief will be available for disposals on or after 11 March 2020.
It has been confirmed there are no transitional rules and this includes where:
- the business ceased to trade prior to 11 March 2020 and the assets or shares are disposed/liquidated after
- the disposal of assets (disposal on or after 11 March 2020) is ‘associated’ with an earlier disposal (Pre 11 March 2020), or
- the gain is a deferred gain that accrues on a chargeable event on or after 11 March 2020. This includes loan notes (non-qualifying corporate bonds) arising from a disposal of shares that have yet to be redeemed
Anti-forestalling rules (pre Budget Day Transactions)
There were also rules introduced that apply to forestalling arrangements entered into before Budget day. In such cases the disposal will be subject to the £1 million lifetime cap unless:
- The parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in section 28 of the Taxation of Chargeable Gains Act 1992, and
- Where the parties to the contract are connected, that the contract was entered into for wholly commercial reasons
In addition, where shares have been exchanged for those in another company on or after 6 April 2019 but before 11 March 2020 (such as to insert a holding company), and
- both companies are owned or controlled by substantially the same persons, or
- persons who held shares in company A hold a greater percentage of shares in company B than they did in company A and, on 11 March 2020, the personal company test, the trading company and the employee/officer test are met in respect of company B,
Then if an election is made under section 169Q of the Taxation of Chargeable Gains Act 1992 (To elect to disapply the share for share exchange rules) on or after 11 March 2020, the share disposal is to be treated as taking place at the time of the election for Entrepreneurs’ Relief purposes, meaning that the new lifetime limit of £1 million will apply.
Therefore, whilst it is a relief it has not been abolished, it has now been restricted, so we need to review clients tax positions to investigate any alternative arrangements in light of the announcements.