In his 2018 Budget speech, Chancellor Philip Hammond confirmed the relief is here to stay but there was a desire to focus the relief more closely on those with a ‘true economic stake’.
The Finance Act 2019 (FA 2019) contains a number of important changes to ER, which affect business owners and management shareholders.
Since its introduction in 2008, ER has enjoyed a one year qualification period but for disposals of shares after 5 April 2019 the qualification period has been extended to two years. This represents a potential trap as those who qualify now will need to ensure they continue to meet the new two year rule if their disposal occurs in the new tax year.
The second change, introduced on the night of the Budget speech imposes further conditions which business owners and entrepreneurs need to meet for a disposal to qualify for ER. The individual must now be additionally entitled to either:
(a) 5% percent of the dividends and assets available to ‘equity holders’ if the company were wound up, or
(b) 5% of the sale proceed due to holders of ordinary shares on a theoretical disposal of the company.
Crucially, the test at (b) above was added at a late stage after input from professional firms, including Crowe. Test (a) is already notorious in its complexity and so it is very likely that it will be test (b) which the vast majority of taxpayers will seek to rely upon.
EMI option holders will be affected by the extension to the holding period but will not need to meet the new ‘personal company’ tests such that the EMI shares granted under relevant options still do need not carry votes or dividend rights to qualify for ER.
FA 2019 which became law on 13 February 2019 provides that minority shareholders who see their investment dip below 5%, as a result of a commercial issue of fresh equity, will be able to elect to protect their ER by crystallising a notional gain. In a simple case this will require the tax to be paid on the full proportionate value of the shares rather than with a discount for a minority holding and is unlikely to be popular. There is also an opportunity for the resulting gain to be deferred until the eventual sale of the shares but under this option, ER will only be available if the other relief conditions (e.g. employment) are met at that future time.
Overall the changes are a lot less intrusive than had been feared. However the relief, initially quite simple in its design, now contains some highly technical areas and the longer qualification period will make reviews more difficult to assess. Business owners and entrepreneurs should review their position in light of the changes and take steps to protect their relief.
For more information on Entrepreneurs’ Relief and help with the changes please contact your usual Crowe contact.