The Autumn Budget
Following the recent Autumn Budget, we’re breaking into our current series of blogs on MBO’s, with a short note about changes in the budget that will affect the future sales of private UK businesses.
It was widely feared that entrepreneurs relief, which has remained unchanged at 10% for many years, would be an easy target for the Chancellor, even potentially abolishing it altogether. Happily for small business owners, there has been only a small amount of tinkering with that relief. The key changes are summarised below.
• To recap, Entrepreneurs’ Relief is a preferential capital gains tax rate of 10% available to individual shareholders who own at least 5% of a company’s ordinary share capital and at least 5% of the voting power in the company.
• Two additional tests have been introduced, these importantly with immediate effect.
• Firstly, in addition to giving the shareholder at least 5% of the votes, the ordinary shareholding must also give at least 5% of the company’s distributable profits available to ordinary shareholders, and 5% of assets in a winding up.
• This means that any share structure which involves more than one share class should be reviewed carefully now if any of the shareholders intend to claim Entrepreneurs Relief on a future disposal of those shares.
• This applies especially to structures involving growth shares or preferred ordinary shares, or any structure where certain shares are either not entitled to dividends or return on a winding up of the company, or alternatively where a share class has preferential dividend or winding up rights.
• Secondly, at present in order to be eligible for Entrepreneurs’ Relief, an individual must meet certain qualifying conditions for a continuous period of 1 year prior to making a disposal. For a shareholder in a private trading company/group, the main conditions are that the shareholder must be a director or employee, and have a 5% shareholding throughout the relevant period prior to disposal.
• The change is that for disposals from 6th April 2019 onwards, the qualifying period is being extended from 1 to 2 years.
• This simply means that owners will need to plan more in advance to ensure the desired shareholding structure is in place at least 2 years before any intended disposal.
The absence of serious changes to Entrepreneurs Relief will be seen in most quarters as a good thing, with minimal worsening of the existing situation. However, now as before, while Entrepreneurs’ Relief offers a potential boost for business owners, its complexities require careful navigation, and detailed understanding of recent legislation. Individuals looking to rely on the relief would be well-advised to conduct an appropriate tax audit or seek specialist advice.
1 November 2018