Policy paper

Capital Gains Tax: entrepreneurs' relief: changes to the treatment of joint ventures and partnerships

Published 16 March 2016

Who is likely to be affected

Individuals and trustees who realise gains on shares in a company which invests in a joint venture company.

General description of the measure

The measure changes the definitions of a ‘trading company’ and a ‘trading group’ which apply for entrepreneurs’ relief (ER) purposes. Where the new definitions apply, a fraction of the activities of a joint venture company will be treated as carried on by a company which holds shares in the joint venture company. Similarly, where the new definitions apply, trading activities of a company in its capacity as a partner in a firm will be taken into account in deciding whether the company is a trading company for entrepreneurs’ relief purposes.

Policy objective

The measure incentivises and rewards investment in trading businesses carried on by companies which do not form part of the same group as the company whose shares are sold. This is part of the government’s policy of supporting enterprise and entrepreneurship.

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 investors in some types of genuine commercial structures where tax avoidance was not a main motive. It was announced at Autumn Statement 2015 that further changes to mitigate the impact of the Finance Act 2015 rules on genuine commercial arrangements were being considered.

Detailed proposal

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 18 March 2015.

Current law

Current law is included in chapter 3 of part 5, and section 165A of the Taxation of Chargeable Gains Act 1992 (TCGA). Subsection (4A) of section 169S TCGA modifies the definitions of ‘trading company’ and ‘trading group’ in section 165A for the purposes of ER. The activities of a joint venture company are not treated as carried on by a company which holds shares in it, and all activities of a corporate partner in a firm are treated as not being trading activities, for ER purposes.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to introduce new definitions of ‘trading company’ and ‘trading group’ for ER purposes. Where the new definitions apply, a company which holds shares in a joint venture company will be treated as carrying on a proportion of the activities of that company corresponding to the investing company’s fractional shareholding in it. Also, the activities of a corporate partner in a firm will be treated as having their true nature (trading or non-trading) when determining whether the company is a trading company.

Where a joint venture company is present, the new definitions will apply for the purposes of a disposal of shares if the person making the disposal on which relief is claimed has at least a 5% interest in the shares of the joint venture company, and effectively controls at least 5% of the voting rights in that company. The interest and voting rights may be held directly or indirectly by the claimant. Where a partnership with a corporate partner is concerned, the new definitions will apply if the person making the disposal is entitled to at least 5% of the partnership’s assets and profits, and controls at least 5% of the voting rights in the corporate partner. For example, a person who holds 20% of a company which does nothing but hold 40% of a trading company’s shares will be treated as holding 8% (20% x 40%) of the trading company and 40% of that company’s activities will be taken into account in deciding whether the person’s shares are shares in a trading company for ER purposes.

The new definitions mean that, in some cases, whether a company is a trading company or the holding company of a trading group will depend on the size of the claimant’s shareholding in the company.

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 are shareholders in a company which invests in joint venture companies, or is or invests in a member of a trading partnership, may be affected if the company isn’t presently a trading company in its own right.

Equalities impacts

ER claimants tend to be male and of above average means. Private equity investors and wealthy individuals make up a significant group of claimants, and are likely to be most affected by this measure.

It’s not anticipated that there will be adverse impacts on any other group with protected characteristics.

Impact on business including civil society organisations

This measure directly affects individual claimants in their personal capacity.

There’ll be an indirect beneficial impact on companies carrying on trading businesses because investors are likely to be more willing to invest in those companies through joint venture arrangements.

There may in some cases be a further indirect impact on companies, who may be asked by claimants to provide information in support of their claims to ER.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

There’ll be no significant operational impact on HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Rob Clay on Telephone: 03000 570 649 or email: rob.clay@hmrc.gsi.gov.uk.