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Entrepreneurs’ relief: the new rules

5th Aug 2016
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Martin Mann talks you through changes to entrepreneurs’ relief as a result of the Finance Bill 2016

The Finance Act 2015 (FA 2015) introduced some restrictive changes to entrepreneurs’ relief (ER) that focused on three areas:

  • Associated disposals.
  • Goodwill on incorporation.
  • Joint venture (JV) structures.

The changes were intended to prevent the relief being claimed via contrived structures or where there was no ‘meaningful withdrawal’ from a business but they also adversely affected claims for relief in the succession of family businesses and some genuinely commercial JV structures.
Practitioners will be relieved that that Finance Bill 2016 (FB 2016) includes provisions, all of which are backdated, which remove many of the 2015 restrictions. The new provisions are complex, particularly in relation to JV structures and do not provide a complete reversal to the position that existed before FA 2015. A summary of the changes is as follows:

Associated disposals
The original changes introduced in FA 2015 meant that disposals after 18 March 2015 would only qualify as associated disposals if a material disposal of at least 5% of an individual’s share in a partnership or limited company was made at the same time. 
In addition, a restriction applied where there was no “meaningful withdrawal” from the business and arrangements existed to potentially allow the individual to retain the asset in the future. This effectively ruled out disposals of assets to family members and had a detrimental effect on family succession planning.
The changes in FB 2016 will now allow a person who wants to pass on their business to a family member as part of a pre-planned family succession to also at the same time, dispose of privately held assets used in the business and claim ER on both their share in the business and the associated disposal of the asset. 
The 5% test introduced in FA 2015 will also be removed for partners who own less than 5% but decide to dispose of the whole of their interest and at the same time a privately held asset. As long as the partner has held a 5% interest continuously for a period of three out of the last eight years up to the date of disposal, relief for the associated disposal can be claimed. 

Goodwill on incorporation
FA 2015 removed goodwill as a relevant business asset for ER purposes where a person (P) disposed of goodwill to a close company (C) which was a related party. A related party is broadly defined where P is a participator or an associate of a participator in C.
The change, which was effective from 3 December 2014, was said to remove unfair advantages on incorporation where owners looked to cash in on the growth of their business at a tax cost of 10%. However, the changes also adversely affected genuine commercial arrangements for retirement planning and pre-incorporations as part of a third-party sale.
FB 2016 has subsequently made amendments allowing ER to be claimed in respect of transfers of goodwill to a close company where the transferor along with a relevant connected person holds less than 5% of the shares and votes. Relevant connected person does not include family members, which allows a sale of goodwill as part of a normal family succession to be eligible for ER.
Relief can also be claimed where a person is required to incorporate before a sale to third parties as long as the shares in the newly incorporated company are sold within 28 days. This is quite a short timeframe but can be extended by HMRC Board Approval.
The provisions in FB 2016 have been backdated to 3 December 2014.

Joint ventures and partnerships
FA 2015 introduced changes whereby ER would be denied on disposals of certain interests in joint venture companies and partnerships that adversely affected some genuine commercial arrangements. Changes have been introduced in FB 2016 that soften the 2015 restrictions such that genuine JV arrangements are not caught.
FB 2016 has since updated the definition of a trading company/group for ER purposes where the shares are held in a company which has an interest in a joint venture company (JVC) or partnership. Where the new definitions apply, ER will be extended where the person holds at least

  • a 5% interest in shares and votes of a JVC; or
  • a 5% interest of partnership profits or assets and voting rights.

The individual’s interests are measured directly and indirectly via various formulae that could mean that depending on the percentage of shares and votes held, some shareholders of a company could qualify for ER and others might not.
Although not a complete reversal these changes will ensure that some commercially driven JV structures will now be efficient from an ER perspective and will provide certainty to others looking to enter into such arrangements.

Conclusion
The new rules add more complexity to an already complex area and specialist advice should be taken well before these type of transactions are carried out. No one size fits all, so each case will need to be reviewed on its own facts.

  • Martin Mann is a director at Gabelle, which works in partnership with the ICPA providing our TaxDesk25 service to member firms

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.

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By Clinton Lee
14th Aug 2016 19:58

That's a good shot at explaining the new ER rules, Martin. But as you say, there's nothing simple about ER. They took an already complex system and made it even more complex ... as only politicians can do!

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