As predicted, entrepreneurs’ relief (ER) was a major casualty of today’s Budget. The headline news is that the lifetime limit has been cut to £1 million of gains with effect from today. There are no transitional rules to soften the blow.
- those who have previously made ER claims for gains of £1 million or more will not get ER on future disposals;
- those who have previously made ER claims for gains of less than £1 million can claim ER on future disposals up to the £1 million threshold (and where a single future disposal would take them over the £1m threshold they can claim for part of the gain, taking them up to the £1 million threshold); and
- those who have not previously made ER claims will be able to claim for £1 million of gains in future.
Any gains over and above the lifetime limit will be charged at the usual capital gains tax rate (generally 20% for the sale of an interest in a company, subject to any other available exemptions and reliefs).
The Government has also introduced some significant anti-forestalling measures. As a result, sellers relying on uncompleted contracts or ER elections on share for share exchanges may also be hit by the reduction in the lifetime limit, depending on their precise circumstances. Anyone potentially within these rules should take advice as soon as possible.
The key elements to the anti-forestalling measures are outlined below.
This rule will apply where:
- there is an unconditional contract for the sale of a relevant asset; and
- entering into the contract includes “a purpose” of “obtaining an advantage” under the capital gains rules which provide for immediate disposal under an unconditional contract.
If the parties are connected, the rule can also apply where the contract has not been entered into wholly for commercial reasons.
This limb is aiming at persons disposing of their interests to special purpose companies or other connected persons – or generating some other type of early disposal - in anticipation of Budget Day changes to ER. Where the rule applies, the seller will be treated as making the disposal at the time when the asset is actually transferred.
If a sale is made under an unconditional contract but the person making the disposal thinks they will not fall foul of the purpose test (and, for connected party transactions, the wholly commercial test), they will have to make a statement to that effect in their claim. HMRC anticipates that the claims would be made in the person’s self-assessment tax return (either in the “white space” or in an attachment).
The breadth of the purpose test and the requirement to make a statement in the relevant claim mark a material change in approach, especially in the context of a relief that had been specifically legislated for. Any purpose anticipating Budget Day changes – not just a “main” purpose (a concept familiar in other areas of tax law) - is enough for the new rules to hit. It will be a brave taxpayer (and/or trustee) who makes a statement that there is no relevant purpose; in the real world commercial decisions are made for a variety of reasons but even if a deal is mainly for commercial reasons that may not be enough here. The ramifications of making a specific statement in a tax claim or return that is not completely accurate can be severe.
Share for share exchanges
This rule is aimed at “one way bet” planning where a share exchange was made but with the taxpayer expecting to choose between a pre-Budget Day disposal and a tax-neutral disposal by making an election in a subsequent tax return to treat a roll-over as a disposal qualifying for ER. The rule applies where:
- there has been a share for share exchange since 6 April 2019 but before today (i.e. a person has sold shares in Company A for an issue of shares by Company B); and either
- there is substantial commonality of ownership between Companies A (immediately before the exchange) and B (immediately afterwards); or
- the relevant shareholders together hold a greater percentage of the ordinary shares in Company B immediately after the exchange than they held in Company A immediately beforehand, and as at today the holding in Company B would satisfy the basic ER conditions.
Where it applies, the disposal will be treated as taking place when the election is made – so will be subject to the new lower lifetime ER limit. However, where HMRC has given a statutory roll-over clearance, the exchange will instead be respected as a roll-over and the ER election can apply in the usual way.
Obtaining clearance on the new rules
HMRC has at least said that taxpayers can seek advice under its non-statutory clearance service where they are not sure whether the new rules (including the anti-forestalling rules) apply. However, this is subject to HMRC’s normal rules on non-statutory clearances – including that they will not provide a clearance where they consider the position to be clear or there to be tax avoidance – so this facility is likely to be of limited practical use.
The EMI scheme
In (possibly) better news, the Government has today announced a review of the EMI scheme. There are few details as yet but the announcement suggests the aim is to enable high growth companies to incentivise talent and that the review will consider opening up the scheme to more companies.