Autumn Budget 2018: additional requirements introduced and holding period extended for Entrepreneurs' Relief

On 29 October 2018, the Chancellor announced significant changes to Entrepreneurs' Relief ("ER"), some of which have immediate effect.

By way of brief reminder of the current position, ER enables individuals to benefit from a 10% tax rate on capital gains (up to a lifetime limit of £10m) realised on certain share and business disposals. Concentrating on share disposals, for ER to be available the following conditions must be met for a minimum qualifying period of one year prior to the disposal:

• the company must be the individual's 'personal company';
• the company must be either a trading company or the holding company of a trading group; and
• the individual must be either an officer or an employee of the company or, (if the company is the holding company of a trading group) another company in the group.

The changes announced on Monday concern the definition of a 'personal company' and the minimum qualifying period.

Definition of 'personal company'

Introduced with immediate effect from 29 October are two new conditions relating to the definition of a 'personal company'. The conditions for personal company status in the law prior to yesterday's announcements were that the individual holds at least 5% of the ordinary share capital (tested by reference to nominal value) in the company and holds at least 5% of the voting rights.

The new conditions, which will apply in addition to the above 5% nominal share capital and voting right tests, require an individual to be beneficially entitled to at least:

• 5% of the company's distributable profits; and
• 5% of the assets available for distribution on winding up.

The new conditions are intended to ensure that an individual has a true material stake in the business through genuine economic rights rather than just a percentage of the nominal value and voting rights. The government's stated aim is that claims should now be limited to those who are within the spirit of the relief.

Minimum qualifying period

Under the current law, for ER to apply the relevant conditions as set out above must be met (without a break) for at least 12 months prior to the disposal of the shares. The Government has announced that this will be extended to a minimum qualifying period of two years, with effect for disposals on or after 6 April 2019.

The two year qualifying period will also apply to holders of enterprise management incentive (EMI) options over shares; currently the holder of EMI options can benefit from ER on a disposal of shares acquired on exercise of those options where the sale of the shares occurs at least one year after the grant of the options. This period, as with the conditions for relief for ordinary shareholdings above, will be extended to two years with effect for disposals on or after 6 April 2019.

Implications of changes

As a result of these changes, it will need to be considered whether certain shareholders still qualify for ER as originally intended – this will include shareholders who hold shares with sufficient nominal value and voting rights to achieve the 5% thresholds, but where their economic rights differ. More generally, consideration will be needed as to whether there may be any basis or approach that could be taken for ER to apply to shareholders whose economic rights diverge from the nominal value and voting power of their holding.

If you have any questions regarding these changes please contact a member of the Taylor Wessing tax team or your normal Taylor Wessing contact.