Entrepreneurs’ Relief post Budget 2020 - PKF Francis Clark
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Entrepreneurs’ Relief post Budget 2020

Ahead of the Budget on 11 March there was a near frantic effort to complete corporate sales prior to potential changes to the Entrepreneurs’ Relief (ER) legislation. As expected significant restrictions were announced with the benefit of ER and the 10% tax rate substantially reduced.

Understandably the Coronavirus crisis has since diverted attention elsewhere. However, I thought it would be helpful to reflect on the ER changes and possible consequences.

The changes

The headline grabber was that the lifetime allowance would be reduced from £10m to £1m, reducing the benefit of ER from a maximum of £1m to £100,000 overnight.

The legislation introduced anti-forestalling measures as HMRC perceived there to be abuse in the lead up to the budget. The impact of these measures are far reaching and can prevent taxpayers from accessing the £10m lifetime allowance. This is despite a reasonable expectation (in some cases) that they would be able to do so on the basis the transaction was completed pre Budget.

The anti-forestalling measures include:

  • Where there was a split contract, exchange pre-budget but completion post-budget, the date of exchange for the purposes of the lifetime allowance is the date of completion. This broadly applies if there was a tax motive to splitting the contract (i.e. seeking to ensure the disposal date for CGT purposes was pre-11 March 2020)
  • Where there has been a transactions involving an exchange of securities between 6 April 2019 and 10 March 2020, if a S.169Q election is made on or after 11 March 2020, the available lifetime allowance against the taxable gain brought into charge is £1m (and not £10m). This is widely drafted and is thought most likely to catch MBO and family led management buy-outs – regardless of whether clearance was obtained from HMRC prior to the transaction (and prior to the Budget)
  • Also share re-organisations, other than those under the provisions of S.135 and S.136, are impacted by the rules regarding the S.169Q election. Upon making a S.169Q election post budget, the available lifetime allowance is £1m (and not £10m)

The devil is in the detail and a detailed review of the anti-forestalling measures is required to understand the consequences for each taxpayer and transaction.

The consequences

It is clear from discussions with HMRC that they were very aware of some of the planning being undertaken in the lead up to the Budget. The anti-forestalling measures are primarily aimed at counter-acting the perceived benefits that were being chased i.e. securing 10% on gains of more than £1m. However, the measures seem to go further than that with more ‘genuine’ commercial transactions potentially falling foul. Issues include:

  • Transactions may have been structured with a significant amount of consideration deferred in the form of loan notes and preference shares. An expectation may have that the future redemptions would qualify for ER. However, with the reduced lifetime allowance this may no longer be the case
  • It is long established that the date of disposal for CGT purposes is the date of exchange. It is hard to imagine that any transaction with a split exchange and completion around the Budget date did not have some tax planning element to it. How are HMRC going to interpret and apply these provisions?
  • The measures relating to the S.169Q election and the exchange of securities apply to transactions entered into between 6 April 2019 and 10 March 2020. This pre-dates political statements being made in the lead up to the election in December 2019. Thus historic transactions are impacted by the Budget announcements and should be reviewed
  • Still on the S.169Q election and transactions involving exchange of securities, the restriction applies where the shareholders of the acquiring company are substantially the same as the target company. It is not clear whether this is based on shareholding percentage or based simply on the identity of the shareholders. Under the later scenario this can lead to some perverse results (i.e. where the existing shareholder wouldn’t qualify for ER in the new structure and would have had a reasonable expectation of being able to make the S.169Q election and benefit from the £10m lifetime allowance)
  • A S.169R election in unaffected by the anti-forestalling measures. Also, there appears to be an opportunity to make a S.169Q election in respect of a restructuring completed under the provisions of S.136 TCGA92 and to still access up to the £10m lifetime allowance

It is important to understand the implications of the reduction in lifetime allowance and the anti-forestalling measures on historic transactions. Delaying redemption of loan notes and preference shares for short period of time to consider the implications may be desirable. We would be happy to review transactions to help assess the impact on such transaction and consider any planning opportunities that may be available.

Finally it is worth noting that the name of ER has been amended to Business Asset Disposal relief, kind of ironic really…

FEATURING: Adam Kefford
Adam is based in the Exeter office within the tax consultancy team. His expertise covers corporate and business taxes, and he spends much of his… read more
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