This year’s Budget saw a small but potentially significant change to Entrepreneurs’ Relief (ER) that may have a bigger impact on flexible workspace (FW) business owners than they realise. Under the reforms announced by Chancellor Philip Hammond the conditions to qualify for ER were altered.
ER is a valuable relief that has been a driving factor in the decision-making process of most of our clients when considering sales of their FW businesses. It can mean an individual pays Capital Gains Tax (CGT) on the disposal of shares they own in a business at rate of 10%, rather than at the standard rate of 20%. For all business owners, this can represent a significant saving on the disposal of a business. To qualify for ER, certain conditions must be met during a ‘holding period’ that, in most cases, ends on the date of disposal of the relevant shares.
New qualifying conditions for ER
From 29 October 2018, two additional conditions must be met in order for some shares to qualify for ER. To qualify for ER, an individual must hold at least 5% of the issued ordinary share capital of the company (measured at its nominal value) and 5% of its voting rights.
The other change lengthened the ‘holding period’ for shareholders in a company from one to two years as of 6 April 2019.
Neither of these reforms is particularly onerous for shareholders minded to sell their company, partly because they are likely to own more than 5% of both ordinary and voting shares in their business and will in most cases have owned their shares for more than two years. It is possible, however, that those within the management structure of the business may have to review what shares they own to see how they might be affected by the reform. It is also possible that some entrepreneurs may look to sell before the new holding period rules come into force in April 2019.
But the greater worry is the growing trend within government to scale back on ER as a relief in general. Moreover, a Labour government opposed to the principal of ER could remove the relief altogether.
Given that ER appears to be in the Treasury’s sights, if you are a flexible workspace owner considering selling your business, please speak to us so that we can look to secure a sale before the relief disappears. While the current government may only have tinkered with the relief on this occasion, its future may not be as secure as many believe.