Budget 2018: Entrepreneurs’ Relief (ER) changes

Entrepreneurs relief (ER) is a valuable relief for small businesses, which when available, can mean gains on the sale of a business, qualifying shares, or qualifying business assets, are taxed at 10% rather than the standard capital gains rate of 20%.

There have been some changes to the conditions to the relief from the last budget, that is worth noting for any businesses that are hoping to use the relief;

Sale of shares

Qualifying conditions for ER before the changes were broadly that for the sale of shares to qualify for the relief;

  • you must hold 5% of the issued ordinary share capital of the company
  • you must hold 5% of its voting rights
  • you’re an employee or office holder of the company
  • the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group

The new conditions for the relief in addition to the two above are that;

  • The conditions above previously applied for a period of 1 year prior to the sale. From 6 April 2019 the period will increase to 2 years.
  • From 29 October 2018 in addition to the 5% requirements set out above, shareholdings must also have an entitlement to at least:
    • 5% of the profits available for distribution to equity holders; and
    • 5% of the assets available to equity holders on a winding-up.

For small businesses, the new additions 5% conditions from 29 October 2019 is less likely to affect you, as small limited company shareholders with ordinary shares may meet the two additional conditions above already. ER is a valuable relief, so if you are unsure of whether it applies or not, then it is worth finding out.