Changes announced in yesterday's Budget have tightened the rules around entrepreneurs' relief with immediate effect, with the potential to impact on existing management equity structures.
Under the relevant legislation prior to the Budget, individuals owning shares in companies (sometimes referred to as "Mancos") that held between 10% and 50% of the shares in a trading company or a holding company of a trading group were able to treat the company as if it were itself a trading company. In principle this enabled up to twenty individuals to hold the requisite 5% of share capital and voting power and benefit from entrepreneurs' relief on an eventual exit of the underlying trading group.
The changes mean that it is no longer possible to treat companies of this type as trading companies (unless they carry on a separate trade themselves). Accordingly, any shareholder in such a company who is within the scope of UK capital gains tax (CGT) will now be liable to the main rate of CGT on any disposal of their shares, and will not benefit from entrepreneurs' relief. It does not matter if the structure was established before the Budget announcements, as the new rules apply to any disposal on or after 18 March. Accordingly, to benefit from entrepreneurs' relief individuals will from now on need to hold the requisite 5% of shares and votes directly in a trading company or the holding company of a trading group.
An unfortunate by-product of this change is that individuals holding shares in companies that are part of a genuine joint venture (e.g. a 50/50 split holding structure) will also no longer be able in principle to benefit from the relief, unless the company they hold their shares in is itself a trading company or the holding company of a trading group or it is possible to restructure the ownership of the JV company (for example, to enable the company in which the individuals hold shares to be treated as the holding company of the overall group). This may of course have other ramifications and in any event the impact of the immediate change to the law is that the required twelve month period of ownership of shares in a qualifying company will have ceased for individuals in such structures, requiring at the least a "re-starting of the clock".