Entrepreneurs’ Relief (“ER”) is a valuable tax relief for many founders and owner managers and a key consideration in exit planning. Where the qualifying conditions are met, individuals pay Capital Gains Tax on a disposal of shares at a rate of 10% rather than the standard rate of 20%.
However, the Autumn Budget brought in some changes to this regime which have the effect of tightening up the qualifying criteria in relation to ER.
The above conditions had to be met for a period of 12 months prior to disposal of the shares (the “Qualifying Holding Period”). Shares purchased by employees under EMI Options had the advantage that meeting the 5% test was not required and the Qualifying Holding Period was treated as starting from the date of grant of the option rather than the date of share issue at the point of option exercise.
The new 5% test still does not apply to EMI options, but the extended Qualifying Holding Period test does (i.e. shares acquired via the exercise of EMI options must have been granted at least 24 months prior to disposal, or 12 months prior for any disposals prior to 6 April 2019).
The extension of the 5% test has some important implications. In particular, those intending to claim ER on a future disposal of shares should consider the following:
Any shareholder planning to rely on ER should review the company’s Articles of Association and other investment or financial documentation to ascertain whether there any potential barriers to ER being obtained on a disposal of their shares. If in any doubt, professional tax advice should be obtained.
Some hurdles to ER can be overcome by restructuring, but given the 24 month Qualifying Holding Period, founders and owner managers should plan early for a potential exit.
If you would like to discuss structuring your company for exit, please get in touch with Laura Peachey.
MBM Commercial LLP does not provide tax advice, nor is this article intended to constitute tax advice. If in doubt, please seek advice from a professional tax adviser.