Entrepreneur’s Relief

Subject to other detailed provisions, a disposal by a shareholder who has at least a 5% interest in the voting rights and nominal capital of a trading company, and who is also an employee of that trading company can attract entrepreneur’s relief. This enables qualifying gains to be taxed at a 10% flat rate of capital gains tax, subject to lifetime maximum of £10m of qualifying gains.

From 29 October 2018, a shareholder must also be entitled to 5% or more of the company’s distributable profits and net assets. 

A further change means that for disposals made on or after 6 April 2019, the minimum qualifying holding period will be increased to 24 months from the current 12 months.  This qualifying holding period will also apply to sole traders and partnerships as well as shareholders.

Further provisions are being introduced from April 2019, so that where a shareholding is diluted by the issue of new shares resulting in the holding falling to below 5%, the taxpayer will be able to calculate their gain and make a claim for entrepreneur’s relief as at the date of that dilution, rather than lose entitlement to the relief altogether. If they wish to, they can elect to defer that gain until a future actual tax liability arises (i.e. on an actual disposal of their shares).

This measure seeks to protect entrepreneur’s relief for minority shareholders up to the date they no longer have a 5% interest in the company and is intended to encourage companies to seek investment to grow without adversely affecting the founding shareholders’ tax positions.