Important changes to ER are now operational

Two significant changes we reported on after the Autumn Budget 2018 which relate to the restrictions to entrepreneurs’ relief (ER), have come into effect from 6 April 2019.

ER is a valuable tax relief; it enables qualifying shareholders and business owners to benefit from up to £1 million in tax relief through a reduced capital gains tax liability when they sell shares in their company, or a share of their business.

Under the changes introduced, the qualifying holding period for assets has increased from 12 months to two years. Further; a shareholder selling shares must, in addition to holding at least 5% of the voting rights in the company, be entitled to at least 5% of the profits available for distribution to shareholders, or in the event of a sale of the company’s shares, be entitled to at least 5% of the proceeds.

What are the implications for company shareholders?

It was always important to be thinking ahead when considering an exit, but these recent changes make this even more relevant.

Shareholders need to be considering their position at least two years in advance of any potential transaction to ensure their ER status is protected. Being eligible for ER means a capital gains tax liability of 10% on the first £10m of gains from a sale, as opposed to paying 20% tax.

Our advice to clients who are company shareholders and who hope to qualify for ER on a disposal of their shares, is to review your position at least two years before a proposed sale, or as soon as possible, and then to monitor your position on an ongoing basis; there are a number of issues that may affect availability to ER including those mentioned here. This is however especially important in situations where a shareholder has been issued preference shares or ‘growth shares’ as these many not have been issued with the appropriate rights to ensure ER is due.

EMI schemes are excluded from the 5% minimum shareholding restrictions

For shareholders who acquired their shares under an EMI (enterprise management incentive) tax advantaged share scheme, the 5% minimum shareholding does not apply, However ER will only be due when the shares are sold at least 24 months after the options were granted. Alongside the other tax benefits of EMI share option schemes, the fact that a minimum shareholding is not required to obtain ER makes the incentive even more beneficial and well worth considering.

RJP offers a full company secretarial and tax planning service and can review whether a shareholding will qualify for ER.

We can also help advise you on the benefits of employee share schemes and can set up an EMI share scheme for your company.