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Entrepreneurs’ Relief restricted to £1m lifetime limit

United KingdomScotland
12/03/2020
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As widely expected the Chancellor has restricted the scope of entrepreneurs’ relief (“ER”) in the Budget with immediate effect. Rather than abolishing it entirely, he has opted to reduce the lifetime limit (the amount of capital gains which qualify for ER) from £10m to £1m. In terms of tax, this reduces the maximum saving from £1m to £100k.

The change will affect disposals taking place on or after Budget Day, 11th March 2020. Those who completed sales to unconnected buyers before Budget Day should be able to benefit from the higher lifetime limit. However, those who entered into uncompleted sale contracts or certain share exchanges pre-Budget may fall foul of anti-forestalling provisions which deny them the benefit of the higher limit.

As a general rule, the time of disposal for capital gains purposes is the time of an unconditional contract rather than completion. Parties to an uncompleted Pre-Budget sale contract will be subject to the £1m limit unless they can demonstrate that no purpose of entering into the contract pre-Budget was to take advantage of the timing rule and, in the case of connected parties, that the contract was also entered into for wholly commercial reasons.

Some taxpayers sought to pre-empt restrictions to ER relief by entering into share exchanges with the intention of electing (after the Budget if ER fears were realised) to disapply the usual capital gains reconstruction reliefs which prevent the pre-Budget exchange being treated as a disposal. The anti-forestalling rules provide that the time of disposal in such cases will be treated as the date of the tax election (and subject to the £1m limit) where taxpayers exchanged shares or securities in a company (“company A”) for shares or securities in another company (“company B”) on or after 6 April 2019 if either:

  • company B has substantially the same shareholders as company A pre-exchange or is controlled by the same persons as those who controlled company A pre-exchange; or
  • the holders of shares in company A together have a larger holding in company B post-exchange and the individual claiming ER continues to satisfy the qualifying conditions for ER in respect of company B.

The draft legislation and explanatory notes can be found here.

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