Understandably the COVID-19 crisis has taken centre stage and, as a result, important changes to Entrepreneurs’ Relief (ER) which took effect on 11 March 2020 did not attract much attention. In his Spring Budget, Rishi Sunak announced that ER would be rebranded ‘Business Asset Disposal Relief’ (BADR) and that the personal lifetime limit for qualifying capital gains taxed at 10% would be reduced from £10 million to £1 million with immediate effect.
Anti-forestalling measures relating to unconditional contracts and beneficial tax elections
In addition to the headline reduction to the ER lifetime limit, various measures were introduced to counteract any actions taken by taxpayers from 6 April 2019 to benefit from the previous lifetime limit of £10 million. These rules apply in circumstances where certain conditions are met such as:
- Unconditional contracts designed to fix an earlier date of disposal to take advantage of the previous lifetime limit for transactions which are actually completed on or after 11 March 2020.
- Share exchanges or reorganisations where tax elections (s169Q TCGA 1992) are made on or after 11 March 2020 to disapply earlier non-disposal events in an attempt to trigger a market value disposal at a time before the lifetime limit was reduced.
In recent years, changes in tax legislation have increasingly been accompanied with these types of “anti-forestalling” measures to stop attempts to get around new restrictions. These measures are wide-ranging and can catch perfectly innocent arrangements so it is always advisable to review the tax changes to understand how these will impact you.
Will you be receiving any deferred consideration?
You may have already undertaken a transaction where part of the consideration on the sale of your business consisted of shares or loan notes issued by the purchaser. Ordinarily, you would be subject to capital gains tax at the time the deferred consideration is encashed.
Where you cease to meet the ER requirements at the time of receipt of the deferred consideration you can make a tax election so that you accelerate the tax point to the date of the transaction rather than the date you will receive the deferred consideration thereby paying capital gains tax at a rate of 10% instead of the current capital gains tax rate of 20%.
The deadline for making the tax election is first anniversary of the 31 January following the tax year of the transaction. You are therefore still in time to make a decision in respect of transaction which took place in the tax year ended 5 April 2019 before the deadline of 31 January 2021. A decision to make this election is not caught by the anti-forestalling measures announced above which only applies from 6 April 2019.
We recommend that any transactions or reorganisations that occurred before 6 April 2019 should be reviewed to consider the new ER / BADR rules.
Are you holding QCB or non-QCB loan notes?
Loan notes are categorised for tax purposes as either as qualifying corporate bonds (QCBs) or not (non-QCBs). A full summary of the rules is outside the scope of this article. Non-QCBs are generally preferred where there is a risk of non-payment of the amounts owed by the buyer. The taxation of the loan notes can be affected by the tax elections mentioned above (s169Q TCGA 1992) and could fall foul of the anti-forestalling measures.
If the sale consideration was settled in the form of QCBs which are subject to a different tax election (s169R TCGA 1992) and they are not caught by the anti-forestalling measures mentioned above.
We strongly recommend that you review any loan notes to determine whether these are QCBs or non-QCBs to determine what if any elections can be made in respect of transactions that occurred between 6 April 2019 and 11 March 2020.
Maximising the reduced limit for Entrepreneurs’ Relief
The restriction to ER will lead to a greater focus on the widening of business ownership and reviewing the tax position of family members to utilise multiple £1m lifetime limits. Advance planning involving interspousal transfers or holdover elections needs to be undertaken at least two years prior to a sale with all other conditions for ER being met.
Utilising other capital gains tax reliefs
The rules relating to Investors’ Relief have remained unchanged with the £10m lifetime limit for qualifying capital gains taxed at 10%. This valuable tax relief is only available to investors who are not employees running the business.
Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) should also be considered by any individual funding a company by subscribing for shares as these investments benefit from generous capital gains tax exemption and deferral relief as well as upfront income tax relief.
Employee Ownership Trusts (EOTs) provide an interesting alternative where, shareholders are happy to sell a controlling interest in their company to such trust set up for the benefit of the employees, could result in the seller not having any capital gains tax liability.