Changes to Entrepreneurs Relief in the Budget

LCF Law's corporate team has had a record year for deal size and volume and continues to work with entrepreneurs to dispose of, acquire, invest in and grow businesses.

A key part of the corporate team's advice to clients is around entrepreneurs' relief (ER) which may be available to claim when a shareholder disposes of a business. ER is available for up to £10,000,000 of lifetime gains and can mean an individual pays Capital Gains Tax (CGT) on the disposal of shares in their employer at 10%, rather than at the standard rate of 20%. However, the recent Budget announced changes to ER as follows:-

• For disposals taking place on or after 6 April 2019, shareholders must have held their shares prior to any disposal for 2 years. This is an increase from the previous requirement of 12 months.
• A selling shareholder must hold 5% or more of the economic rights in the company. This is in addition to the requirement for shareholders to hold 5% or more of capital and voting rights.

The rules relating to the 5% economic test are complicated. Unless the company has a single class of shares with pari passu rights attaching to its shares, LCF Law's corporate team are working with clients to make sure that the tax planning completed prior to these changes is reviewed and amended as necessary. For companies with different classes of shares with differing economic rights it is important to seek advice in order to confirm whether ER will still be available on disposal.

Importantly, the changes do not apply to shares acquired on the exercise of Enterprise Management Incentive (EMI) share options and it remains possible for such shares to attract ER regardless of their voting or economic rights. EMI options therefore will be even more attractive in the context of the recent changes.

For more information on business disposals and share option schemes please contact us today on 01423 851 131.

This article was written by Clementine Duckett. Clementine is a Partner in our Corporate Law Department and is based in Harrogate.

Clementine advises companies, management and funders on all areas of company law such asacquisitions, disposals, shareholder arrangements, equity structures, investment,corporate reorganisations, re-financing and management buy-outs.