In the lead up to every Budget day there is always some debate about whether or not the Chancellor of the day will change the CGT regime in respect of business assets that has (usually) given rise to a 10% rate.
For a long time that was ‘business asset taper relief’, there was something of a hiatus in 2008 when we moved to a flat rate of 18%, and then hurriedly back to 10% with the introduction of entrepreneurs’ relief (ER) in the same year.
Whilst others debated a change in the rate it has long been my personal view that a twelve month holding period was too short to deserve the best tax rate available. Instead I could see a real argument for a return to some form of taper relief or more likely an extension to the qualifying holding period to twenty four months – and that is finally what has happened.
Interestingly the Chancellor opened this section of his speech explaining that he had received some calls to abolish ER altogether, but had decided against this – however it wasn’t a passionate defence of ER and that might concern some people particularly if there is to be another Budget in the event of a no deal Brexit.
The changes will be effective for those disposals made on or after 6 April 2019, however for those disposals after that date where the business in question ceased to trade prior to 29 October 2018 the business need only have traded for the one year period.
Those shareholders who are targeting the ER rate of 10% therefore now need to understand the importance of the two year window and undoubtedly the analysis around when a company actually begins to trade will become something that we focus on slightly more carefully.
It’s worth pondering over how many disposals do actually occur in the twelve to twenty four month period. We see a number of clients particularly in the renewables sector (where there a number of related tax issues associated with the disposal in any event) and many are only just able to meet the twelve month test as things stand.
In addition to the extension of the qualifying period there is some tightening of the 5% aspect of the relief. Now not only will a shareholder need a 5% interest in the votes and the ordinary share capital, they will need a 5% interest in the assets of the company and the profits available for distribution. This concept is brought across from the group relief rules to which we will now need to look at more regularly when considering the ER position. At the centre of that definition is the concept of an ‘equity holder’ and provided that a loan made to the company is a normal commercial loan this will not impede the ability of a shareholder to make a claim – however ‘funny’ loans (and other instruments) which have equity characteristics will cause problems.
The 5% change shouldn’t make too much of a difference to most ER claims, however the entitlement to ER may now change in situations where has been a previous buy out / MBO, or where so called growth shares have been implemented. In short any scenario where there are different classes of shares with a variety of rights will need to be reviewed to determine whether ER that was previously available has now been lost. Whether the CIOT and ICAEW (and perhaps the BVCA) will be leading some form of dialogue with HM Treasury to get the rules softened is yet to be seen.
From an EMI perspective the options / shares will now need to be held for two years before they can qualify for ER – so the sooner the better for the introduction of an EMI scheme.
Obviously all of these changes follow on from the introduction of the liquidation TAAR and the beefing up of the transactions in securities changes introduced in April 2016. For a number of clients their view increasingly is that ER is under attack and may not survive for much longer. Whilst this is a view that I’ve not historically shared the Chancellor’s lack of defence for the relief itself in the Budget statement and the uncertainty around Brexit means that I am probably feeling more so than at any time previously that ER may well be something that is consigned to history in the not too distant future.