Major change to entrepreneurs relief announced in Budget

• United Kingdom

• Private equity - Briefings

30-10-2018

It has been announced in the budget that, with immediate effect, there are two new qualifying conditions that have to be met before an individual is entitled to entrepreneurs’ relief.

The measures are designed to ensure that it is only those who the Government see as carrying out “true entrepreneurial activity” and who have an economic interest in a company benefit from entrepreneurs’ relief. The Government was concerned that entrepreneurs’ relief has been accessed more by individuals who were investors / directors, meaning that the relief was not encouraging the spirit of entrepreneurship it was designed to.

The two new conditions (both of which have to be met throughout the qualifying period) are that the individual needs to be beneficially entitled to:

• 5% of the company’s distributable profits
• 5% of its assets available for distribution to equity holders in a winding up.

These are in addition to the current conditions (all of which have to be met throughout the qualifying period) that:

(i) the company is a trading company (or holding company of a trading group) and

(ii) the individual:

• needs to be an employee / office holder in (generally speaking) a group company;
• need to have 5% of the ordinary share capital of the company; and
• they need to be able to exercise 5% of the votes of the company.

These proposed changes are major and will impact disposals after today’s date, irrespective of when the shares were acquired. The proposed changes will cause (in particular) management investors in companies an unexpected additional tax bill.

Further, it was announced that (generally) the qualifying period through which the conditions noted above have to be met will (from April 2019) be extended to 2 years for disposals on or after 6 April 2019.