Richard Coombs, Tax Partner at Bates Weston comments: “Whilst some commentators were predicting that the Chancellor would end the very generous capital gains Entrepreneurs Relief, he stopped short of that in the Budget and instead just tinkered with it.  Entrepreneurs Relief reduces the tax on qualifying capital gains on business assets to 10% (from the usual rate of 20%) and most business owners, rightly or wrongly, expect to get the relief when they sell their business.  However, the devil is in the detail and there are numerous instances of business owners being denied the relief due to poor planning prior to sale.  The further changes in the Budget have therefore made pre-sale planning all the more important.  The main additional changes introduced can be summarised as follows:

  • The minimum qualifying holding period of the asset being sold has been increased from one year to two years
  • The shares must be entitled to at least 5% of the assets of the company on a winding up.  We have already seen one instance where this could potentially cause a problem where the articles of a company had different rules for allocation of proceeds on a winding up compared to a company sale.  Without further planning this would now deny the main shareholders of getting the relief
  • The shares must also be entitled to 5% of the reserves available to pay as dividends.  This test has been poorly written in the draft legislation and is already creating some discussion amongst tax professionals about how the test should be applied, but at a minimum it is vital that the shares have dividend rights to at least 5% of the reserves.

The main message to all business owners is to ensure that they perform a regular Entrepreneurs Relief “MOT”.  If you wait until you want to sell the company, it may well be too late to change anything due to the two year qualifying period and therefore we strongly advise all shareholders to review their position in light of the changes.  Our tax team would be happy to review your structure to give you the comfort that you need.”