Ideas for Clients Worried about Entrepreneurs’ Relief (ER)

Guest blog by Andy Woods, ETC Tax.

Are Your Clients Worried about the Future of Entrepreneurs’ Relief? Some Ideas to Consider:

Key Points

• If you or your clients are worried about Entrepreneurs’ Relief (“ER”) – act quickly!
• Various methods apply to trigger a gain and ER before 11 March
• Use of deferred completion can be most flexible method

Background

Following our article in last month’s newsletter. We have been asked by a number of readers to expand a little on some of the ideas to help ‘bank’ Entrepreneurs’ Relief before the Budget, and possible changes, on 11 March.

Go on then, you’ve twisted my arm.

Sale to Trust

One could decide to transfer the shares to a new trust before 11 March 2020 such that a capital gain, and ER, is triggered before any changes.

The tax on any such gain – which would arise in the 2019/20 tax year – would be payable by 31 January 2021.

One would need to consider anti-avoidance provisions in this area.

Sale to Company

Alternatively, one could decide to transfer the shares to a new company. Again, this should take place before 11 March 2020 to trigger the gain and ER before any changes.

The transfer of shares to a new holding company (in exchange for shares) would usually be done on a tax neutral basis. However, it is possible to dis-apply this relief such that a gain is crystallised.

Tax would be payable by 31 January 2021.

Once again, one would need to consider anti-avoidance provisions in this area.

Deferred Completion

This provides a way to ‘hedge one’s bets’. Either the transfer to the trust or company route should be possible.

If the shares are sold to either the Trustees or the new Company and completion is deferred then the relevant tax point is the date of exchange. In other words, if the contract is entered in to before 11 March but not completed then the gain (If the contract completes) will be taxable in 2019/20 and ER will be available.

However, no tax liability actually becomes due unless the contract is completed. If the contract is not completed and the planning unwound (because, say, there are no adverse changes), then there would be no tax charge at all.

If there are adverse changes then the contract could be completed and ER banked.

Other points to consider

One needs to bear in mind that the Chancellor could be nuanced in how he dealt with an abolition of ER.

Firstly, he could bring in the abolition such that it applies only prospectively to new investments / businesses. My view is that this is not likely. If they are going to create bad press they will certainly want to accelerate the revenue benefits by making this apply to existing business owners.

Secondly, the Chancellor might include rules which specifically prevent the use of the deferred completion.

Both points need to be considered.

Summary

One also needs to be careful of certain anti-avoidance rules, albeit, depending on the circumstances, these may be managed. However, we would recommend seeking formal tax advice as part of any planning exercise.