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Budget 2016 - Capital Gains Tax – Entrepreneurs’ Relief Long Term Investors

24th March 2016

Background

Entrepreneurs’ relief is a capital gains tax relief on eligible disposals of shares or securities in trading companies or other eligible business assets. The first £10 million of gains accrued on the disposal of shares in a trading company by an individual who has worked for the company and owned at least 5% of the ordinary shares in the company for 12 months, are taxed at a rate of 10% instead of the 18% or 28% capital gains tax rate (to become 10% and 20% respectively from 6th April 2016) that would otherwise apply.  

 

Proposed Changes

Entrepreneurs' relief will be extended to long-term investors in unlisted companies. From 17 March 2016, anyone buying newly-issued shares in an unlisted companies will see their CGT capped at 10% up to an allowance of £10 million, provided they are kept for at least three years from 6 April 2016.

 

The extension to entrepreneurs’ relief, introducing investors’ relief, will apply to gains accruing on the disposal of certain qualifying shares by individuals (other than employees and officers of the company). In order to qualify for relief, a share must:

 

  • be newly issued, having been acquired by the person making the disposal on subscription for new consideration;

 

  • be in an unlisted trading company, or unlisted holding company of trading group;

 

  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016; and

 

  • have been held continually for a period of three years before disposal

 

An individual’s qualifying gains for investors’ relief will be subject to a lifetime cap of £10m. Rules will ensure that this limit applies to beneficiaries of trusts.

 

From 18 March 2015 anti-avoidance rules were introduced to restrict the availability of entrepreneurs’ relief where the vendor company had interests in a trading company/group via joint venture or partnership.  Legislation will be introduced in the Finance Bill 2016 such that providing the new definition of trading company/group are met, a company which holds shares in a joint venture company will be treated as carrying on a proportion of the activities of the joint venture company.  Provided a shareholder effectively holds at least 5% of the joint venture company entrepreneurs’ relief will be available (assuming all the other conditions are met).  The proposal is to backdate the amendment to disposals on or after 18 March 2015.

 

Reasoning

Extending Entrepreneurs’ Relief to external investors is intended to provide a financial incentive for individuals to invest in unlisted trading companies. There should be increased incentive to take capital gains relative to income. Individuals making qualifying investments will be able to access a lower rate of CGT than they would if they had invested in non-qualifying investments.

 

Tom Smith