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This publication is available at https://www.gov.uk/government/publications/reduction-in-the-lifetime-limit-for-entrepreneurs-relief-technical-note/reduction-in-the-lifetime-limit-for-entrepreneurs-relief-technical-note
At Budget 2020 the Chancellor of the Exchequer announced that the lifetime limit of Entrepreneurs’ Relief would be reduced from £10 million to £1 million for Entrepreneurs’ Relief qualifying disposals made on or after 11 March 2020.
There are special provisions for disposals entered into before 11 March 2020 that have not been completed, and in relation to certain Entrepreneurs’ Relief elections following a share reorganisation or an exchange of shares for those in another company.
This note provides guidance in relation to Finance Bill legislation published alongside this note.
1.1 What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief reduces the amount of Capital Gains Tax paid on disposals of qualifying:
- shares in a personal company
- shares from an Enterprise Management Incentive (EMI)
Under pre-Budget rules Capital Gains Tax is paid at 10% on claims up to a lifetime limit of £10 million worth of qualifying gains.
1.2 What is changing?
For disposals on or after 11 March 2020 (Budget day), the amount of lifetime gains that qualify for Entrepreneurs’ Relief will reduce from £10 million to £1 million.
Rules will also apply the revised limit to certain arrangements and elections that seek to apply the earlier £10 million lifetime limit – they are:
- forestalling arrangements involving uncompleted contracts – see 1.5 below
- elections made under section 169Q of the Taxation of Chargeable Gains Act 1992 (TGCA 1992) in connection with a share reorganisation or exchange – see 1.6 below
These rules only have practical effect where the arrangement seeks to obtain relief for chargeable gains that, when cumulated with past gains, exceed the new £1 million lifetime limit.
1.3 Disposals on or after 11 March 2020
For disposals made on or after 11 March 2020, the total amount of all types of qualifying gain that can qualify for relief will be £1 million, taking into account earlier disposals.
- A person disposes of a qualifying personal company on or after 11 March 2020 with gains of £2 million, the person is a higher rate taxpayer and has not previously claimed Entrepreneurs’ Relief.
- The first £1 million worth of chargeable gains will be eligible for the Entrepreneurs’ Relief rate of Capital Gains Tax of 10%.
- The remaining chargeable gains will be liable to Capital Gains Tax at 20% (subject to the application of the person’s annual exempt amount).
- A person disposes of a qualifying personal company in the tax year 2019 to 2020 but before 11 March 2020 with gains of £300,000 and has not previously claimed Entrepreneurs’ Relief, and disposes of another qualifying personal company on or after 11 March 2020 with gains of £1 million. The person is a higher rate taxpayer.
- The chargeable gains for the first disposal will be eligible for the Entrepreneurs’ Relief rate of Capital Gains Tax.
- Only the first £700,000 of chargeable gains for the second disposal will be eligible for the Entrepreneurs’ Relief rate of Capital Gains Tax.
1.4 Transitional cases
There are no transitional rules for disposals that take place after 11 March 2020, including where:
- negotiations were in progress up to 11 March 2020 but a contract for the disposal is entered into on or after 11 March 2020
- the business ceased to trade prior to 11 March 2020,
- the disposal is ‘associated’ with an earlier disposal, or
- the gain is a deferred gain that accrues on a chargeable event on or after 11 March 2020.
1.5 Forestalling arrangements entered into before 11 March 2020: delayed completion
The legislation contains rules that counter certain forestalling arrangements that seek to ‘lock-in’ to the pre-Budget day lifetime limit. Those arrangements make use of:
- unconditional contracts entered into before Budget day,
- the time of disposal rule at section 28(1) of TCGA 1992, and
- contractual completion of the disposal after Budget day.
The arrangements normally include the creation of a company or other vehicle that ‘stands on contract’ until such time as a further purchaser is found.
The rule being introduced maintains the date of disposal for the contracts but applies the new lifetime limits to these disposals unless:
The parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in section 28 of TCGA 1992, and
Where the parties to the contract are connected, that the contract was entered into for wholly for commercial reasons
and a claim is made.
For these purposes the meaning of ‘connected person’ is that given by section 286 of TCGA 1992. Information on this can be found in HMRC’s Capital Gains Manual at CG14580.
An arrangement would normally be expected to fall outside of the tests, and be subject to the new lifetime limits, where the unconditional contract has been entered into in anticipation of a change to the scope of Entrepreneurs’ Relief.
Where a person believes that the tests are met, and the disposal is subject to the pre-11 March 2020 lifetime limits, they must make a claim to this effect (an ‘additional claim’) as well as the normal claim for Entrepreneurs’ Relief. For most persons this would mean including both claims in a Self Assessment tax return (see sections 42 to 43F of the Taxes Management Act 1970).
The additional claim is to include a statement or declaration that the contract was not entered into with a purpose of obtaining a Capital Gains Tax advantage by reason of the application of section 28 of TCGA 1992 and, where the disposal is to a connected person, that the contract was entered into for wholly commercial purposes. Where a tax return is made, this statement should be included in the ‘white space’ in the return or as an attachment.
Where the affected gains relate to disposals by trustees of a settlement the statement is to be made jointly with the qualifying beneficiary in the same way as with Entrepreneurs’ Relief claims under section 169M(2)(a) of TCGA 1992.
1.6 Company reconstructions and elections under section 169Q of TCGA 1992
Shareholders in a company may not be treated as making a disposal of their shares when the shares are exchanged for alterative shares in the company or those in another company. However, section 169Q of TCGA 1992 allows, on election, a claim for Entrepreneurs’ Relief to be made as if the exchange involved a disposal of the original shares for capital gains purposes.
Special rules will apply where an election under section 169Q is made following a share reorganisation or share exchange. The effect of these rules is that the new lifetime limit will apply to gains that result from the making of the election.
The rule will apply where:
- there has been a company reorganisation within the meaning of section 126 (but not section 135 or 136) of TCGA 1992 in the tax year 2019-20, but prior to 11 March 2020; and
- the individual claiming ER meets the normal ‘material disposal’ conditions for the relief on a disposal of their shares in the company on 11 March 2020 (that is, the company remains the individual’s personal company and is either a trading company or the holding company of a trading group; and the individual is an officer or employee of the company or a company within the same trading group).
The rule will apply where:
- there has been an exchange of shares for those in another company within the meaning of section 135 of TCGA 1992 in the tax year 2019-20, but prior to 11 March 2020; and
- the exchange falls within one of the 2 cases mentioned below.
The 2 cases are as follows:
1. The first case is where immediately before and after the exchange either:
- the persons that held the shares or securities in company A are substantially the same as those that hold the shares or securities in company B, or
- the persons that controlled company A are substantially the same as those that control company B.
For these purposes:
- ‘company A’ and ‘company B’ have the same meanings as in section 135 of TCGA 1992
- connected persons (within the meaning given by section 286 of TCGA 1992) are treated as the same person
- ‘control’ has the meaning given by section 288(1) of TCGA 1992
This case could include, for example, a situation where 3 equal shareholders in company A (each holding one third of the shares) have different holdings in company B (say, 20%, 20% and 60%) following the exchange.
2. The second case is where:
- after the exchange the persons holding shares in company B, who also held shares in company A, together hold a greater percentage of the ordinary share capital immediately after the exchange than before, and
- the individual claiming Entrepreneurs’ Relief meets the normal ‘material disposal’ conditions for the relief on a disposal of their shares in company B on 11 March 2020 (that is, company B is the individual’s personal company and is either a trading company or the holding company of a trading group, and the individual is an officer or employee of the company or a company within the same trading group).
For these purposes ‘company A’ and ‘company B’ have the same meanings as in section 135 of TCGA 1992.
This case could include, for example, a situation where before the exchange there are 3 equal shareholders in company A (each holding one third of the shares) and after the exchange, and the exit or retirement of one of the shareholders, the remaining 2 original shareholders each have a 50% share in company B. This test will be applied to each individual separately.
In addition, where a person has received advance clearance from HMRC that the anti-avoidance rule in section 137 of TCGA 1992 will not apply to an exchange that took place in the tax year 2019 to 2020, but prior to 11 March 2020, then there are no circumstances in which that rule can apply. Where a person makes an election under section 169Q of TCGA 1992 then the rules applicable to the 2 cases mentioned above will apply.
The rule does not affect the chargeability of any transfers to Stamp Duty or Stamp Duty Reserve Tax.
Persons who are uncertain about whether these rules apply to their circumstances may seek advice from HMRC’s Non-Statutory Clearance Service, subject to the normal clearance conditions. This service will be available from the time the rules become law.