The Budget included an announcement about Entrepreneurs’ Relief; make sure you are up to date with the latest rules.

The usual pre-Budget rumours were doing the rounds regarding large scale changes to Entrepreneurs’ Relief. Post-Budget there is some relief in the accountancy world as it appears that – for the time being – Entrepreneurs’ Relief is here to stay. But changes were announced which you need to understand before advising your clients further.

What has changed?

As detailed in our Budget special issue last month the Chancellor announced two key changes to Entrepreneurs’ Relief which may affect client’s plans. These are:

  • an extension of the qualifying holding period from one year to two years from 6 April 2019
  • a change in the rules regarding the share rights/interests in the company that the claimant needs to hold to qualify.

What are the effects on taxpayers?

 Extension of the qualifying period

This means that taxpayers considering a disposal will need to consider the impact of the change to disposals on or after 6 April 2019.

The other effect – also requiring planning – is that taxpayers looking at retirement or changes to their business will need to consider a timetable at least two years in advance of any potential changes.

Share rights/interests

The changes amount to a tightening of the rules. At present, in in order to qualify, the shareholder must have held shares which represented 5% of the voting rights.

However the new regime, which applies to all disposals after 29 October 2018, includes a further requirement that the individual needs to have had an entitlement to 5% of the distributable profits and the assets available for distribution in a winding-up, in addition to the existing stipulation of 5% of the voting rights.

Clearly this is aimed at ensuring that the individual genuinely had an economic interest in the business rather than being part of an arrangement that brought them within the Entrepreneurs’ Relief scheme.

Do consider how you will encourage clients to plan ahead. This is especially important where equity changes within the company are being considered. Funding via preference shares may be also complicate things.

The good news – transitional relief

Transitional rules will apply where the claimant’s business ceased before 29 October 2018, so that the old one year period will continue to apply to claims on disposals of assets within three years of cessation. The business will need to have been carried on for only one year prior to cessation.

Where the claimant’s personal company ceased to be a trading company (or the holding company of a trading group) before 29 October 2018 the old one year period will continue to apply to disposals of shares within three years of cessation. The company will need to have been a trading company (etc) for only one year prior to cessation.

Article from ACCA In Practice