ENTREPRENEURS’ RELIEF - 26.11.2018

Budget change = ER trap

Quiet. The 2018 Budget contained no headline-making reforming measures, though your working age clients will be pleased to know that the higher and additional rate relief for pension contributions is to continue. In addition, entrepreneurs’ relief (ER) is here to stay, but the rules have been tightened up. Here we consider how these will affect sales of shares.

Personal. ER applies to disposals of shares in a company that has been the individual’s personal company for at least twelve months. This requires your client to have owned at least 5% of the nominal value and voting rights of all the issued share capital.

Changes. With effect from 29 October 2018, your client will also need to have held 5% of both the distributable profits and the rights to assets available for distribution on a winding up. Additionally, for disposals made on or after 6 April 2019, the minimum holding period will be doubled to two years.

Pro advice. This is unlikely to affect straightforward sales of a personal company, but there are other situations that could cause problems.

Example. Your client James has been a successful sole trader for several years. He is planning to retire in 2019 and to sell to an interested competitor to finance this. As part of this process James incorporated in August 2018. He was advised that he would need to wait until August 2019 to secure ER on the new shares. However, following the 2018 Budget he would not qualify for ER, and may need to continue for another year if the difference in tax would be material.

Pro advice. You also need to look for clients who have sold their company but retained some shares, for example as part consideration or in a reorganisation. You may find that the rights to assets on a winding up are defined by reference to the share issue price, and so fail the 5% test, especially if the shares are founder shares whose price will have been nominal. Review the position for clients as a matter of urgency.