Pre-Budget rumours of the death of Entrepreneurs' Relief proved to be premature. The relief has survived, but the Chancellor has attempted to balance concerns about the cost of the relief and its effectiveness as an incentive to invest against its value to owner managers of smaller businesses by cutting the lifetime limit for relief from £10 million to £1 million with effect from Budget Day (11 March 2020).
This reduces the maximum tax saving that can be achieved by claiming the relief (on current tax rates) from £1 million to £100,000. The change will apply to all disposals made on or after 11 March 2020, which will include sales under conditional contracts which have exchanged, but where the conditions precedent to completion have not yet been satisfied.
Accompanying the reduction in the lifetime allowance are anti-forestalling measures (two of them announced on Budget Day and a further measure included in the draft Finance Bill), aimed at planning designed to trigger taxable disposals and "bank" ER before Budget Day.
Unconditional Contracts completing after Budget Day
The first anti-forestalling provision is aimed at planning involving transfers of assets under unconditional contracts. Broadly, this planning involves entering into an unconditional contract to sell an asset (with a connected entity such as a trust or with a third party) before Budget Day, which can be completed at a later date. The planning relies on the fact that the capital gains tax (CGT) rules provide that in these circumstances, the time of disposal for CGT is the date when the contract is entered into, rather than when it subsequently completes.
The rules provide that where an unconditional contract for the sale of an asset has been entered into prior to 11th March, but the contract is completed on or after that date, the disposal will be treated as taking place when the contract completes (not, as is normally the case under the CGT rules, when the contract goes unconditional) unless either:
- The parties to the contract are not connected and no purpose of the contract was to obtain a tax advantage by exploiting the timing rules for CGT disposals; or
- The parties to the contract are connected and the contract was entered into wholly for commercial reasons, with no purpose of exploiting the CGT timing rules.
In each case, the seller of the asset must make a claim for entrepreneurs' relief including a declaration that no purpose of the disposal was exploiting the CGT rules.
Section 169Q Elections
Section 169Q elections allow an individual who is exchanging shares which qualify for entrepreneurs' relief for shares which do not qualify for relief in circumstances where they would otherwise be able to defer a CGT charge on the old shares to elect to trigger a disposal and "bank" the relief on the disposal of their old shares.
These elections must be made by the first anniversary of 31 January in the year following the tax year of disposal; for example, if the share exchange takes place on 1st June 2018, the seller would have until 31st January 2021 to make the election.
Two anti-forestalling rules have been introduced in relation to the making of section 169Q elections.
169Q elections and Share Exchanges
The first anti-forestalling rule (which was announced on Budget Day) is aimed at planning involving putting a new holding company (Company B) on top of an existing company (Company A) in order to trigger a right for shareholders to make a section 169Q election where the ownership and control of the new company is the same as the old or where the shareholders in Company A increase their interest.
This rule will apply where, after on or 6 April 2019 but before Budget Day, shares in Company A are exchanged for shares in Company B and either the shareholders in Company B are substantially the same as those in Company A or the controlling shareholders of Company B are substantially the same as those in Company A.
The rule will also apply where the shareholders in Company A, taken together, hold a greater percentage of the ordinary share capital in Company B immediately after the exchange than they held in Company A before the Exchange (and certain of the qualifying conditions for ER are satisfied by an individual on 11th March 2020).
Where the rule applies, the effect will be that if the individual has not yet made a section 169Q election, but does so on or after Budget Day, the election will apply as though the individual's disposal happened on the date when the election was made, rather than the date of the transaction (meaning that the new lower ER limit applies).
169Q elections and Reorganisations
The second anti-forestalling rule did not appear in the legislation published on Budget Day, but has been included in the draft Finance Bill and appears to be targeted at share reorganisations more generally, presumably aimed at situations where reorganisations with limited commercial effect were undertaken purely for the purpose of triggering the right to make a section 169Q election.
The rule applies where a reorganisation (as defined in the capital gains tax legislation, and including an issue of further shares to shareholders in proportion to their existing holdings or the variation of rights attaching to a particular class of shares) took place between 6 April 2019 and Budget Day and an individual holds shares satisfying certain of the ER qualifying conditions on Budget Day.
As with the rule on share for share exchanges, the effect if that if the individual makes a section 169Q election, but does so on or after Budget Day, the election will apply as though the individual's disposal happened on the date of the election, rather than the date of the reorganisation.
Whilst the anti-forestalling rules are clearly aimed at planning to accelerate capital gains, they are drafted widely enough to be of concern in some commercial transactions – the rules in relation to the making of section 169Q elections may be of particular importance to certain taxpayers, as they do not require a tax avoidance purpose and may therefore apply to certain reorganisations which have been undertaken for genuine commercial reasons.
For the Budget announcement and draft legislation as at Budget Day, please follow this link.
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