Entrepreneurs’ Relief: tightening the belt?
Since its introduction in 2008, Entrepreneurs’ Relief has been a massive boost to the SME and OMB sector.
Since its introduction in 2008, Entrepreneurs’ Relief (ER), a relief from capital gains tax that, subject to certain conditions being met, allows individuals and certain trustees to dispose of shares in trading companies or groups at a reduced tax rate of 10% on qualifying gains up to a lifetime limit (currently £10m), has been a massive boost to the SME and OMB sector.
When first introduced, relief was restricted to up to £1m of qualifying gains but this has steadily increased to its current limit of £10m which took effect from 6 April 2011.
It may be however that we have seen the end of this upward trend and the stage has been set such that we may even see a reduction in the limits and/or changes to the rules that will make it harder to qualify for the relief.
The background to this is a recent report by the Public Accounts Committee, chaired by Margaret Hodge, which has criticised HMRC in its policing of the relief and pointed out that the relief cost the public finances £2bn more than forecast last year. This is likely to put pressure on HMRC more closely to scrutinise claims for ER and may even lead to legislative changes.
Whilst it is considered unlikely that ER will be abolished, given that the Government has already warned of further austerity to come and the need to make further savings, a reduction in the ER lifetime limit back down to £5m or even £1m is not out of the question. It is unlikely that such changes, which would be unpopular within the business community, would be announced prior to the next election, particularly as there is little money in the kitty to provide any headline grabbing tax breaks and to distract attention from any cuts. Post election however, whichever party or coalition is in power, there is a real possibility that changes could be made.
One area that may be particularly vulnerable is the use of “top up” shares. These are shares which, although they carry voting rights, have very limited economic rights. In order to qualify for ER in relation to the disposal of shares and securities, one of the requirements is that the individual must hold at least 5% of the ordinary share capital of the company (by reference to the nominal value of the shares). To qualify for ER, the shareholding must give them at least 5% of the voting rights. In many cases where managers and key executives have previously held less than 5% of the shares, they have been issued a separate class of shares which do not increase their economic entitlement but simply ensure they hold 5% of the nominal value and voting rights. These arrangements have been widely used in private equity backed companies (although we are now seeing a move towards issuing shares pursuant to Employee Shareholder Status arrangements instead). It would be a quick win for the Exchequer, and necessitate only a very simple amendment to the legislation, to change the qualifying requirements to require 5% economic entitlement. As noted above, whilst such changes are considered unlikely to be made in the 2015 budget, the current generous lifetime limits on claims for ER may not be here forever.
If you are interested in finding out more about this or any other tax issue, please contact Haydn Rogan, a Partner in the Corporate & Commercial department, on 0161 214 0517 or email email@example.com.