The Budget 2018: Major change to entrepreneurs’ relief

• United Kingdom

• Tax planning and consultancy - Budget

30-10-2018

It was announced in the Budget that, with immediate effect, there are two new qualifying conditions that have to be met before an individual is entitled to entrepreneurs’ relief.

The measures are designed to ensure that only those whom the government see as carrying out “true entrepreneurial activity” and who have an economic interest in a company should benefit from entrepreneurs’ relief. The government was concerned that entrepreneurs’ relief was being accessed more by individuals who were investors/directors, meaning that the relief was not encouraging the spirit of entrepreneurship which it was designed to do.

The two new conditions (both of which have to be met throughout the qualifying period) are that the individual needs to be beneficially entitled to:

• 5% of the company’s distributable profits; and

• 5% of its assets available for distribution to equity holders in a winding up.

These are in addition to the current conditions (all of which have to be met throughout the qualifying period) that (i) the company is a trading company (or holding company of a trading group) and (ii) the individual:

• is an employee/office holder in (generally speaking) a group company;

• holds 5% of the ordinary share capital of the company; and

• is able to exercise 5% of the votes of the company.

These proposed changes are major and will impact disposals from 29 October 2018, irrespective of when the shares were acquired. The proposed changes will cause an unexpected additional tax bill for managers who already hold investments in companies which up until that date qualified for relief. In addition, the proposed changes may cause private equity houses to reconsider the level of economic incentivisation that they offer to management investors.

Further, it was announced that (generally) the qualifying period through which the conditions noted above have to be met will (from April 2019) be extended to 2 years for disposals on or after 6 April 2019.

Please view our dedicated Budget 2018 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

www.eversheds-sutherland.com/thebudget

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