In the 2018 Budget, the Chancellor introduced changes to Entrepreneur’s Relief, which is available on the disposal of assets or shares held in a personal company. There had been a lot of speculation about the possibility of Entrepreneur’s Relief being removed completely, but instead the Chancellor has tightened up the rules on its availability.
Whilst some of the draft legislation that has been released, provides insufficient clarity on certain adjustments which were enacted on Budget Day 29 October 2018. Some have created more confusion.
The new rules for the period throughout which the qualifying conditions must be satisfied are more certain. From 6 April 2019 the period is being increased from 1 to 2 years.
Whilst it has always been clear what the holding period means, it will become more important that the relevant dates are certain to ensure the availability of the relief.
For example, there will need to be clarity around the date on which the business started. A business needs to be trading for Entrepreneur’s Relief purposes and a trade therefore needs to be conducted on a commercial basis with a view to realisation of profits. This may not include speculative transactions or pre-trading research and it is not necessarily the date of incorporation.
We would always advise clients to keep records showing the date of commencement of the trade for this very reason.
Similarly the cessation of the business can be another grey area. Often a business will cease at the end of a contract or when a last piece of work has been done. If the sale is after this date, then clarity will be needed to approve what the date of cessation was and it may be that you were continuing to trade, but HMRC may consider that the last piece of work completed should be your cessation date. If you enter into an unconditional contract for the sale of your business then this determines the tax year in which the capital gain will be charged, and this may be different to the year in which the completion takes place, but there is no indication that HMRC will consider the period between exchange and completion as not being eligible for Entrepreneur’s Relief.
If you are potentially thinking about ceasing your business or entering into discussions to sell your trade, then please contact us and we can discuss these new rules with you and how they may impact on your eligibility for Entrepreneur’s Relief. For sale agreements, the potential for exchange of contracts before the end of the tax year is now becoming less likely and so you need to consider whether you need to continue trading for a longer period in order to be eligible for Entrepreneur’s Relief.
Your personal circumstances and the value of your business may or may not be impacted by the availability of this relief and from a commercial standpoint, paying a slightly higher rate of Capital Gains Tax may be a more advisable option than waiting for an alternative purchaser in 12 months time.
We will be happy to discuss all these matters with you if required.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.