Don’t lose out when disposing of your business

Boat near Island

Entrepreneurs’ Relief (ER) is a valuable tax relief for those disposing of a business. It can give access to a 10% rate of capital gains tax, subject to a £10 million lifetime limit. ER is potentially available to company shareholders, owners of unincorporated businesses and trustees. But for a claim for ER to be successful, close attention to the detail of the rules is critical – and important new conditions have recently been added.

New ownership period

Ownership conditions apply throughout the period up to the date of disposal. Budget 2018 brought change affecting all business owners and shareholders looking to claim ER. For disposals on or after 6 April 2019, the necessary qualifying period of ownership is extended, becoming two years, rather than one. Where the claimant’s business ceased, or their personal company ceased to be a trading company (or holding company of a trading group) before 29 October 2018, the one-year qualifying period still applies.

Company shareholders and trustees

For company shareholders, and trustees who are company shareholders, there are new rules on what constitutes a ‘personal company’. An individual must, throughout the relevant qualifying period:

  • be a company employee or office holder
  • hold at least 5% of the company’s ordinary share capital and
  • be able to exercise at least 5% of the voting rights and
  • satisfy either the distribution test, or the proceeds test.

The conditions in the last bullet point are the new conditions added recently.

Note that for trustees who are company shareholders, the qualifying beneficiary of the trust must (had they owned the shares personally) fulfil these criteria, and pass either the distribution or proceeds test.

Distribution test

For disposals on or after 29 October 2018, Budget 2018 introduced the requirement that an individual must satisfy the ‘distribution’ test. By virtue of their holding, an individual must be entitled to at least 5% of the company’s profits available for distribution to ‘equity holders’, and 5% of the assets available for distribution to ‘equity holders’ in a winding up. Note that the basis is profits available to equity holders, rather than shareholders: this has wider impact.

Unfortunately, this could impact companies genuinely issuing different classes of shares – sometimes known as ‘alphabet’ shares – to different shareholders. As different classes of shares have different rights, alphabet shareholders may not meet the distribution test. The existence of preference shares could also affect the outcome.

Proceeds test

To address this, the government introduced an alternative test, based on proceeds on disposal.

For disposals on or after 29 October 2018, the individual must, in the event of a disposal of the whole of the ordinary share capital of the company, be beneficially entitled to at least 5% of the proceeds.

Here the 5% threshold is computed by reference to the market value of the company at the end of the qualifying period, but the test will need to be met throughout the two-year holding period (one year for disposals before 6 April 2019). This could mean – in situations where the new distribution tests are not met – that it would not be apparent whether ER will be available until shares are actually disposed of.

Review now

These changes will impact many claims for ER, and we would strongly recommend that you review your eligibility for ER now.

If your current shareholding fails to qualify under the distribution test, and may not qualify under the proceeds test, your qualifying ownership period has ended. To reactivate eligibility for ER, action to change shareholding will be needed. Please do not hesitate to contact us to discuss whether you need to act to ensure ER will be available on any future disposal.

Why Choose Hamlyns?

Personalised Service

We take a unified and unique approach to accountancy; providing an individual service to our clients

Time & Dedication

We take the time to offer proactive and innovative advice that help our clients achieve their long-term goals

Holistic Approach

Our holistic approach offers a combination of professionalism, a personal touch and attention to detail

Quality Assurance

Every one of our professional team is a member of one or more of the ICAEW or the ACCA

What Our Clients Say

Hamlyns treat me as an individual. I don’t feel like “just another client” to be processed.

Diana Boulter
MD, DBA Speakers

Chris and his team gave us precisely the advice our business needed, even before we knew we needed it!

Mike Higgins
Managing Director, Hawkmoor Limited

It’s great that I always get to speak to the same Partner who knows our situation, so I don’t need to keep repeating things.

Johnny Richards
Finance Director, Normandy Garage

When we came to Hamlyns, we were a start up business. In a few years, they’ve really helped us become a major player in our sector.

Frank Pawley MBE
Chairman, Global Travel Management Ltd

We have been working together for over 10 years and our relationship is vital to the success of our business; I would not hesitate to recommend them.

Angela Hall
Partner, Occupational Health Professionals LLP

I appreciate Hamlyns expert and informed guidance and helpful approach.

Managing Director, Arcom IT

Hamlyns took the stress away by anticipating and understanding what I needed.

Managing Director, PromoLogistics Limited

Hamlyns gave me great advice and hand-holding to ensure my exit from the company was quick and clean. I am also thousands of pounds better off. Thank you, thank you.

Douglas Cooke
Former Director