Capital Gains Tax: changes to rules to extend availability of Entrepreneurs' Relief on goodwill on incorporation
Published 16 March 2016
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1. Who is likely to be affected
Individuals (including partners in a firm) who transfer their business to a close company and become or remain a participator in the acquiring company.
2. General description of the measure
The measure allows Entrepreneurs’ Relief (ER) to be claimed, subject to certain conditions, on gains on the goodwill of a business when that business is transferred to a company controlled by five or fewer persons or by its directors. The principal condition is that the claimant must hold less than 5% of the acquiring company’s shares. There are special rules to allow relief where the acquiring company is then sold to a third party.
3. Policy objective
The measure incentivises and rewards proprietors of businesses when their business is transferred to a limited company. It promotes the stability and continuity of a business when ownership passes to a limited company. This is part of the government’s policy of supporting enterprise and entrepreneurship.
4. Background to the measure
Finance Act 2015 introduced new rules to combat abuse of ER. Whilst preventing the abuse, those rules also resulted in relief not being due to a person selling their business to a close company in which they, or a member of their family, held any shares whatsoever. It was announced at Autumn Statement 2015 that changes to mitigate the impact of the Finance Act 2015 rules on genuine commercial arrangements for sales of businesses were being considered.
5. Detailed proposal
5.1 Operative date
The changes announced by this measure will be backdated to the date on which the Finance Act 2015 measures became effective. They will therefore apply to disposals on or after 3 December 2014.
5.2 Current law
Current law is included in chapter 3 of part 5 of the Taxation of the Chargeable Gains Act 1992 (TCGA). Section 169LA prevents gains on goodwill from being included in the gain eligible ER where specified conditions are met.
5.3 Proposed revisions
Legislation will be introduced in Finance Bill 2016 to allow ER to be claimed in respect of gains on goodwill where the claimant holds less than 5% of the shares, and less than 5% of the voting power, in the acquiring company. This ‘holding condition’ will replace the requirement in section 169LA of TCGA that the claimant must not be a ‘related party’ in relation to the company.
Relief will also be due where the claimant holds 5% or more of the shares or voting power if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner.
5.4 Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| -45 | -20 | -40 | -40 | -40 |
These figures are set out in Table 2.1 of Budget 2016 as ‘Capital Gains Tax: extend reliefs’, and have been certified by the Office for Budget Responsibility. They represent the combined Exchequer impact of a number of changes at Budget 2016 to extend the availability of existing reliefs, including Entrepreneurs’ Relief.
More details can be found in the policy costings document published alongside Budget 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
Individuals who dispose of goodwill in a business to a close company in which they or members of their family hold shares are likely to be affected.
Equalities impacts
ER claimants tend to be male and of above average means. Individuals selling their businesses on retirement make up a significant group of claimants. People ceding control of their business to a company, for instance on retirement, are likely to be most affected by this measure.
It is not anticipated that there will be adverse impacts on any other group with protected characteristics.
Impact on business including civil society organisations
This measure affects disposals made by individuals of assets held in their personal capacity. There is therefore no direct impact on businesses, but it is expected to benefit businesses indirectly by supporting the transfer of the business to a company for genuine commercial purposes such as growth and succession.
Operational impact (£m) (HMRC or other)
There will be no significant operational impact on HM Revenue and Customs.
Other impacts
Other impacts have been considered and none have been identified.
6. Monitoring and evaluation
This measure will be monitored through communication with affected taxpayer groups.
7. Further advice
If you have any questions about this change, please contact Rob Clay on Telephone: 03000 570649 or email: rob.clay@hmrc.gsi.gov.uk