Recent changes to Entrepreneurs’ Relief

The Budget in March 2015 announced a number of adjustments to the rules on entrepreneurs’ relief. Most of these changes are intended to close down tax planning opportunities which HM Revenue & Customs (HMRC) considers to fall outside the policy objectives of entrepreneurs’ relief. For the university spin-out sector, there was an interesting announcement that the Government is looking into the possibility of relaxing the qualifying conditions for entrepreneurs’ relief in the case of academics who hold shares in spin-out companies.

Where does entrepreneurs’ relief apply?

Entrepreneur’s relief (ER) reduces the rate of capital gains tax to 10 per cent for the first £10 million of qualifying gains made by an individual (or, in some circumstances, a trustee). Qualifying gains include gains on:

• A disposal of shares of a trading company (or the holding company of a trading group):
  • Where for one year before the disposal, the individual has been an officer or employee of the company (or a company in the same group) and holds at least 5 per cent of the ordinary share capital, allowing him to exercise at least 5 per cent of the voting rights; or
  • Where the shares are acquired on or after 6 April 2013 on the exercise of an Enterprise Management Incentives options granted at least one year before the disposal.
• A disposal of the whole or part of a business as a going concern if the business has been owned by the individual (whether as a sole trader or in partnership) for one year before the disposal. Assets held by the business for investment purposes, or not used for the purposes of the business, do not qualify for relief.
• Associated disposals of personally-owned assets if used in a partnership or company, if a number of qualifying conditions are met.

Entrepreneurs' relief denied for shares in companies without a trade of their own

With effect from 18 March 2015, a company will not qualify as a trading company simply by virtue of its participation in a joint venture or partnership. A company must carry on a trade of its own for its shares to qualify for ER.

This change has been introduced to prevent the use of structures HMRC regard as an artificial route to ER (such as “management company” structures under which individuals own 5 per cent of the shares in a non-trading company which owns 10 per cent of the shares of a trading company).

Entrepreneurs' relief on transfer of goodwill

As announced in the 2014 Autumn Statement, sole traders and partners who transfer their business to a related close company on or after 3 December 2014 will be not be entitled to claim ER on the value of the goodwill. However, this restriction will not apply to partners who dispose of their partnership share to a company but do not acquire shares in that company or in any associated company.

Entrepreneurs’ relief restricted on associated disposals

With effect from 18 March 2015, individuals wishing to claim ER on the disposal of a personally-owned asset used in their business or a qualifying company must, at the same time, make a significant disposal of their share in the business or shares in the company. This means an interest representing at least 5 per cent of the assets of a partnership or 5 per cent of the ordinary shares of the qualifying company (and there must be no arrangements to reacquire an increased partnership share or additional shares). Until now, any disposal, however small, out of a material holding was sufficient.

Entrepreneurs' relief for academics

The Chancellor announced that the government will review the ER treatment of academics who dispose of shares in spin out companies that exploit intellectual property to which they have contributed. To qualify for ER, an individual needs to hold at least 5 per cent of the shares (or a holding of shares acquired on the exercise of an EMI option) in a qualifying company and to be an employee or officer of that company in the 12 months ending on the date of sale. For academics, these requirements are difficult to meet both because of their academic commitments and because the funding required to develop the product is likely to mean that they are left with less than 5 per cent of the shares in the spin out company.