There was mixed news for entrepreneurs in the 2018 Budget. The key point is that, despite some speculation in the media, the Chancellor has remained committed to Entrepreneurs' Relief – considering that it is the right way in which to incentivise UK enterprise. However, he has tightened up the requirements to claim the relief to ensure that the person claiming the relief has, in his words, "a true material stake" in the business. He has, therefore:
- increased the period for which the qualifying conditions must be met before relief can be claimed from one to two years; and
- tightened the conditions to meet the "5% test" required for a company to be treated as the shareholders personal company by adding further requirements that the shares entitle the owner to 5% of any dividends from the company and 5% of the assets available on a winding up.
These changes will not affect the entrepreneur who has spent significant time and effort in building up his or her business together with those who own a genuine 5% stake in the company. However, it will restrict some arrangements involving separate classes of shares that may have been created to meet the old voting and share capital requirements without giving the holder a full 5% commercial interest in the company.
It has not all been bad news as the rules are also being relaxed in two ways:
- if the entrepreneur incorporates a business that they have been running, the two year qualifying period includes the period during which they previously ran the business; and
- if the company issues additional shares to raise capital, and this dilutes the owner below 5%, entrepreneur's relief will be available for the period up to the date of raising the new capital
This last change only comes in from April 2019 and so anyone thinking of raising further capital that would dilute them below the 5% threshold may wish to hold off until the new tax year.
The Chancellor left capital gains tax (CGT) broadly unchanged in the 2018 budget, but has tweaked rules on tax relief for entrepreneurs by extending the qualifying period of the tax break from 12 months to two years, with the aim of encouraging longer-term investment in British business.