Prior to April 6 2019, entrepreneurs’ relief allowed some business owners, investors and trustees to reduce Capital Gains Tax from 20% to 10% after a year. Now it takes two years…and there’s more.
Key phrases in this article:
Entrepreneurs’ relief: A reduction in Capital Gains Tax (CGT) payable on profits from the sale of some or all of a company’s business assets.
Capital Gains Tax (CGT): Tax on any profit made when selling something that’s increased in value, in this case, business assets. The amount of CGT payable on profits from the sale of business assets is 20% for higher rate taxpayers (for basic rate taxpayers, it’s a little more complicated). Entrepreneurs’ relief can reduce this to 10% up to a lifetime limit of £10 million.
- Property used for business purposes
- Shares in the company
Who can apply for entrepreneurs’ relief?
Following changes announced in the autumn budget 2018 and in effect since April 6 2019, any individual with some form of ownership in a company can apply for entrepreneurs’ relief providing:
A: the company is trading for business purposes, and
B: the individual’s ownership:
- has been in effect for at least two years
- amounts to at least 5% of the ordinary shares and 5% voting rights in the company.
Previously, individuals were potentially eligible for entrepreneurs’ relief after one year in a business. This has changed to two years.
There is a new requirement to ensure an individual’s holding in a company entitles them to at least 5% of company profits available for distribution and 5% of a company’s shares or assets on winding up.
Why and who’s affected?
HM Revenue & Customs (HMRC) made reference to the changes being designed to ensure shareholders benefit from having a true material stake in the company, as opposed to a purely investment or employment involvement.
The changes affect individuals who, on or after 29 October 2018, realise any gains on disposals of assets from a business in which they hold shares. The government predicts this will be fewer than 1,000.
The extension from one year to two means individuals need to think differently about why they work in a company and for how long. Shareholders will need to consider their position at least two years in advance of any potential transaction.
If you’d like to talk in more detail about Capital Gains Tax and whether you might be eligible for entrepreneurs’ relief, now or in the future, please speak to your Courtiers adviser or contact us
Please note that tax treatment depends on individual circumstances and may be subject to change in the future.
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