The government has listened: further changes to Entrepreneurs’ Relief from CGT are announced
Following representations by a number of professional bodies, the government has (on 21st December 2018) tabled amendments to the Finance (No.3) Bill currently before Parliament so as to address many of the concerns raised that the changes proposed to be enacted following the 2018 Budget went far beyond what was required to achieve the policy intent and would have had the effect of denying the relief in those cases in which the company has more than one class of share in issue and/or the individual had no entitlement to dividends on the class of shares held.
The further measures tabled on 21 December 2018 include changes to paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes. These amendments add a test based on the shareholder’s entitlement to at least 5% of the proceeds in the event of a sale of the whole of the ordinary share capital in the company. This test can be used instead of those based on having an entitlement to at least 5% of both (i) the profits available for distribution and (ii) assets on a winding up. Those tests remain “to provide certainty to those with straightforward company structures”, but the new alternative test will help those who, for commercial reasons, are not able to meet the original tests. It does not rely on the definitions in the Corporation Tax Act 2010.
This provides welcome relief to many shareholders in companies with standard form articles which, for example, do not give a clear entitlement to a pro rata amount of any dividends declared.
Other changes make clear that the new alternative test is to be applied as at the last day of the period throughout which the company is required to have been the individual’s “personal company” (i.e. typically, on a sale of the company, at the time of that disposal). In determining if a company is an individual’s “personal company” by reason of the individual satisfying the new alternative test, it is to be assumed that the company is sold for its market value and that, having regard to all the circumstances, the individual is then beneficially entitled to that to which it would be reasonable to expect the person to be beneficially entitled. For this purpose, any tax avoidance arrangements are to be ignored.
January 2019
David Pett, Tax Barrister 