Entrepreneurs' Relief Changes
4 February 2019
You may have noted from various budget updates the changes to Entrepreneurs’ Relief (ER).
Of particular concern are the new rules requiring beneficial entitlement to at least 5% of the distributable profits from a company, and entitlement to 5% of the assets on a winding up. These new rules are treated as implemented from 29th October 2018.
The initial review of the draft legislation raised concerns that companies with multiple classes of share capital could be impacted with their shareholders potentially losing their ER entitlement. This could have applied where the Articles of Association are drafted in such a way that a dividend can be declared on each class of share to the exclusion of the others, and there is no absolute entitlement to at least 5% of that distribution.
The tax and accountancy profession quickly lobbied government, standing up for the entrepreneur to request amendments to the draft legislation to reverse what we hoped were unintended consequences of sloppy drafting. After an anxious, but thankfully short, wait HM Treasury issued revised draft legislation on 21st December which fixes the problem.
The latest draft (at the time of writing) introduces a second ‘economic benefit test’. The tax payer claiming Entrepreneur’s Relief is required to meet one of the two tests. The new second test appears to be much easier to meet for a typical owner managed business. It involves the shareholder being entitled to 5% of the proceeds of a theoretical sale of the entire ordinary share capital of the company.
It appears H M Treasury have admitted that the initial draft gave rise to unintended consequences. Whilst the amendment is very welcome many transactions were put on hold awaiting a resolution to the problem and, as we are all painfully aware, delays in a commercial environment can be very costly.
The Entrepreneurs’ Relief legislation has now been tinkered with several times since its introduction 10 years ago. It’s starting to look a bit like my dog’s breakfast. So please do take advice if you or your clients are planning to avail yourself of this very beneficial but now quite complex tax relief.