At Budget 2020 the Chancellor of the Exchequer announced that the lifetime limit of entrepreneurs’ relief (ER) would be reduced from £10 million to £1 million for ER qualifying disposals made on or after 11 March 2020.
Rules will also apply the revised limit to certain arrangements and elections that seek to apply the earlier £10 million lifetime limit. These rules are:
– forestalling arrangements involving uncompleted contracts; and
– elections made under TGCA 1992, s 169Q in connection with a share reorganisation or exchange.
There are no transitional rules for disposals that take place after 11 March 2020, including where:
– negotiations were in progress up to 11 March 2020 but a contract for the disposal is entered into on or after 11 March 2020;
– the business ceased to trade prior to 11 March 2020;
– the disposal is ‘associated’ with an earlier disposal; or
– the gain is a deferred gain that accrues on a chargeable event on or after 11 March 2020.
The legislation contains rules that counter certain forestalling arrangements that seek to ‘lock-in’ to the pre-Budget day lifetime limit. Those arrangements make use of:
– unconditional contracts entered into before Budget day,
– the time of disposal rule at section 28(1) of TCGA 1992, and
– contractual completion of the disposal after Budget day.
The arrangements normally include the creation of a company or other vehicle that ‘stands on contract’ until such time as a further purchaser is found.
The rule being introduced maintains the date of disposal for the contracts but applies the new lifetime limits to these disposals unless:
1. The parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in TCGA 1992, s 28; and
2. Where the parties to the contract are connected, that the contract was entered into for wholly for commercial reasons;
and a claim is made.
Company reconstructions and elections under TCGA 1992, s 169Q
Shareholders in a company may not be treated as making a disposal of their shares when the shares are exchanged for alterative shares in the company or those in another company. However, section TCGA 1992, s 169Q allows, on election, a claim for ER to be made as if the exchange involved a disposal of the original shares for capital gains purposes.
Special rules will apply where an election under section 169Q is made following a share reorganisation or share exchange. The effect of these rules is that the new lifetime limit will apply to gains that result from the making of the election.
Further details on the changes to ER can be found in HMRC’s on the subject.