On 29 October 2018, the Chancellor of the Exchequer delivered the 2018 Autumn Budget to the House of Commons. The generous Entrepreneurs’ Relief scheme has survived, however the conditions for qualification have tightened.
Individuals that qualify for Entrepreneurs’ Relief are still only required to pay a flat rate of 10% on any taxable chargeable gain arising on the sale of shares (regardless of whether they are a basic, higher or additional rate taxpayer). To qualify, as was previously the case, the gain must still have arisen in respect of shares held in a trading company and the entrepreneur must have held at least 5% of both that company’s ordinary share capital and voting rights.
However, additional qualification criteria have been introduced in respect of shareholdings:
- From 29 October 2018, shareholders must now also have been entitled to at least 5% of the company’s distributable profits and net assets (i.e. the assets that would be available on the winding up of the company) prior to the sale of its shares; and
- For disposals on or after 6 April 2019, the minimum period throughout which the qualifying conditions for Entrepreneurs’ Relief must have been met prior to the disposal will change from 12 months to 24 months.
This extension of the qualifying holding period to 24 months will also apply to Enterprise Management Incentive (EMI) option holders, although the period during which options are held will be taken into account. However, there remains no minimum shareholding requirement in respect of shares acquired under an EMI option scheme; holders of EMI options may qualify for Entrepreneurs’ Relief irrespective of whether they own or are entitled to less than 5% of the company’s voting or economic rights.
These changes aim to “support longer-term business investments”, so are more likely to affect entrepreneurs looking for a quick exit. In practice, many entrepreneurs will automatically meet the additional shareholding percentages by virtue of the fact that they hold 5% of the share capital and voting rights, whilst longer-term planning can help to ensure that the “24 month” requirement is met.