I spent all my years believing you, but I just can't get no relief

Entrepreneurs' relief is a valuable tool for business owners to minimise their tax payable on a disposal of the business or an interest in it. Applying to the first £10m of qualifying capital gains it reduces the rate of CGT to just 10%.

Pre budget 2018 the requirements for claiming the relief were that there was disposal by an individual (or in some cases a trust) of

• Shares in a trading company where the seller was:
  • an employee or officer of the company
  • and in which they had owned at least 5% of the ordinary share capital
  • and with the ability to exercise at least 5% of the voting rights
  • each for at least 1 year ending on the date of disposal;
• The transfer of all or part of a business the seller had owned for at least a year ending on the date of disposal;
• Assets used for the purposes of a business at the time when the business ceased; and
• Disposal of personally owned assets (assets the seller owns but is use used by the business) alongside a disposal of at least 5% of the sellers interest in the business and other related conditions.

The relief is commonly claimed for the sale of shares, or the transfer of all or part of the business and it is these areas that are considered below.

The 2018 budget has made some minor but significant changes to the requirements, which will take effect on any disposals from 6 April 2019 and which could catch out those who are planning on selling their business, or shares in the business.

The most significant change is the increase of the period from one year to two, both for the holding of shares and the ownership of the business.

Further changes include two new tests for the sale of shares. The seller must meet one or both of the following two tests: (1) have at least a 5% interest in the company's distributable profits and be entitled to at least 5% of the assets available to equity holders on a winding up, and/or (2) be entitled to 5% of proceeds in the event of a disposal of the whole of the company's ordinary share capital. For this proceeds test there are three assumptions – firstly that the whole of the ordinary share capital is disposed at its market value on the final day of the period, secondly that the sellers share of the proceeds is the amount that the seller would reasonably expect to be beneficially entitled to at that time and thirdly the effect of avoidance arrangements is disregarded.

There is some good news however, a new Chapter 3A has been introduced, which is designed to allow business owners who, by an issue of new shares, would cease to be eligible for the relief. The new chapter allows the owner to determine the amount of gain they had made on the period they were entitled to the relief by a deemed disposal and reacquisition. The owner can then defer that gain until they actually dispose of the shares, so not incurring a "dry" tax charge.

The new rules take effect from 6 April 2019. On this date, individuals who would have qualified for the relief by holding their shares for over a year may suddenly find that they do not qualify as they have not met the new two year requirements, so care must be put to ensure that sllers are aware of the updated holding periods. Extra care will also need to be taken that sellers meet the new interest tests, and that there are no rights granted to other shares that take them below the 5% threshold for distributable profits or assets at a winding up.

Oliver is an associate in our Corporate team.