Sarah Laing examines the changes to entrepreneurs’ relief as announced in the March 2020 Budget.
When an individual disposes of an asset at a gain, capital gains tax may be due. Ordinarily, for gains falling above the higher rate threshold (i.e. £50,000 in 2020/21), this will be charged at a rate of 20%.
However, if certain conditions are met, business asset disposal relief (BADR) (formerly known as entrepreneurs’ relief (ER)) may be available, and the chargeable rate reduced to 10%.
The March 2020 Budget announced a significant restriction on the future availability of ER for individuals who dispose of all or part of their business, individuals who dispose of shares in their personal company, and trustees who dispose of business assets.
Broadly, the lifetime limit of £10 million is reduced to £1 million for disposals on or after 11 March 2020. The measure also provides that the lifetime limit must take into account the value of ER claimed in respect of qualifying gains in the past.
For disposals between 6 April 2011 and 10 March 2020, the lifetime limit on gains qualifying for ER is £10 million.
The £10 million limit is a lifetime threshold and claims may be made against it on more than one occasion.
The second change announced in the Spring Budget 2020 is the renaming of ER. From 2020/21 onwards the relief is the same, but the name has changed to ‘business asset disposal relief’.
Selling all or part of a business
To qualify for BADR, both of the following conditions must apply:
- the individual must be a sole trader or business partner; and
- the individual must have owned the business for at least two years before the date they sell it.
The same conditions apply if the business is closing rather than being sold. The business assets must be disposed of within three years to qualify for relief.
Selling shares or securities
To qualify, both of the following conditions must apply for at least two years before the shares are sold:
- the individual is an employee or office holder of the company (or one in the same group); and
-
the company’s main activities are trading (rather than non-trading activities like investment) or it is the holding company of a trading group.
There are other rules depending on whether or not the shares are from an enterprise management incentives (EMI) scheme. Broadly, if the shares are from an EMI scheme, the investor must have both:
- bought the shares after 5 April 2013; and
- been given the option to buy them at least two years before selling them.
If the shares are not from an EMI scheme, for at least two years before the shares are sold the business must be a ‘personal company’. This means that the investor has at least 5% of both the shares and the voting rights in the company. The investor must also be entitled to at least 5% of either:
- profits that are available for distribution and assets on winding up the company; or
- disposal proceeds if the company is sold.
Selling assets previously lent to the business
To qualify, both of the following must apply:
- the investor sold at least 5% of their part of a business partnership or their shares in a personal company; and
- they owned the assets but let their business partnership or personal company use them for at least one year up to the date they sold the business or shares, or the date that the business closed.
Practical tip
The changes will increase the amount of tax paid by a business sold at a profit of over £1 million. For potential sale profits at or around this limit, it may be possible to extract value from the business prior to sale, for example through increased employer pension provision, to ensure the threshold is not exceeded.
