The changing face of entrepreneurs’ relief

Feb 11, 2019
Although entrepreneurs’ relief wasn’t abolished or capped in the 2018 budget, it is subject to additional conditions.
Entrepreneurs’ Relief (ER) is the fundamental capital gains tax (CGT) relief in the United Kingdom (UK). It replaced business asset taper relief in April 2008 and provides the opportunity to obtain a 10% CGT rate on gains from qualifying business disposals if certain conditions are met. The relief has gradually been extended to cover £10 million of lifetime gains.

Prior to the autumn 2018 budget, there was concern that ER could be significantly capped or even abolished. The good news is that there were no changes to the overall value of ER, but the bad news is that there are now additional conditions which must be satisfied for ER to apply.

Change effective from 6 April 2019

This change involves an increase from one year to two years in the qualifying period over which the necessary qualifying conditions must be met. Individuals who acquired a qualifying holding of shares between 6 April 2017 and 5 April 2018 will therefore be subject to the minimum holding period of one year provided the sale takes place on or before 5 April 2019. From 6 April 2019, however, those shares may then cease to meet the minimum holding period until the new two-year period is reached.

This will require careful consideration regarding the timing of a sale. It is important to remember that entering into an unconditional contract represents the disposal date for CGT and not the completion date. Hence, could there be agreements entered into on 5 April 2019 with completion thereafter? Alternatively, there may be situations where the sales process is delayed until the two-year period is met and the use of option agreements may also be considered.

Change effective from 29 October 2019

Changes have been made to the definition of a “personal company”. Two additional tests have also been introduced to ensure that the shareholder has a genuine economic interest in the shares being disposed.

Previously, a personal company was one in which the individual held at least 5% of the ordinary share capital of the company and at least 5% of the voting rights. From 29 October 2018, the individual is also required to be:

  • Beneficially entitled to at least 5% of the profits available for distribution to the equity holders of the company; and
  • Beneficially entitled, on a winding up of the company, to at least 5% of the assets of the company available for distribution to equity holders.
The proposed ER legislation broadly imports the definition of equity holders and assets available for distribution from the existing group relief provisions in chapter six of part five of Corporation Tax Act (CTA) 2010.

This is a complex area and consideration will be required on a case-by-case basis. Where a company has issued convertible loan notes, debt securities with “equity-like” features or where the interest on the debt exceeds a commercial rate of return, for example, this will cause significant issues and a potential dilution of an individual shareholder in the “equity holders” pool, potentially bringing them below the 5% threshold.

In determining assets available for distribution, the definition within Section 166 of CTA 2010 provides that assets available are the assets amount minus the liabilities amount. The problem with this definition is that internally generated goodwill or intellectual property is unlikely to be included in the assets amount. Companies with no net assets are assumed to have a sum of £100 to distribute.

It is also likely to cause problems for shareholders with entitlement to growth or freezer shares and may also cause problems where there are “alphabet” shares in the company, depending upon the rights attaching to them in the articles. These changes do not impact enterprise management inventive (EMI) shares.

Further change from 21 December 2018

Given the complexity of the new rules introduced on budget day, a late proposed amendment to the legislation has been made inserting an alternative test to the two new 5% economic tests.

This new test requires that, on the date of disposal, the selling shareholder would have been entitled to 5% of the proceeds in the event of a hypothetical sale of all of the company’s ordinary share capital on that day. This test is good news, especially for companies with alphabet shares, and it is likely that when individuals look to consider if ER is available, they will first consider if this test is met in priority to the other alternative economic tests.


Following these changes, the assessment of whether ER is available will be significantly more complex. It will be important to consider the interaction of these changes from budget day, 21 December 2018 and 6 April 2019 and establish what possible planning can ensure the future availability of ER. The above represents a short overview of the proposed new rules and may be subject to further changes as the Finance Bill proceeds through Parliament. Specific advice should be sought in advance of any proposed transaction.

Kate Hamilton is a Senior Tax Manager at BDO Northern Ireland.