Entrepreneurs Relief
It was widely predicted that the Chancellor might abolish entrepreneurs relief in the Budget and he nearly did so, reducing the lifetime limit from £10 million to £1 million in respect of disposals on or after Budget Day 11th March.
In fact he did abolish it. Entrepreneurs relief no longer exists. Schedule 2 to the Finance Bill provides that it shall now be called “business asset disposal relief”.
What is perhaps more of a surprise are the forestalling proposals which are designed to catch people who made a disposal of business assets before the Budget in the hope of obtaining entrepreneurs relief at the pre-Budget level. (Shock horror. You mean people took advantage of a relief provided by Parliament exactly as they intended? Goodness me – that must be the zenith of repugnant tax avoidance).
More seriously, what does a person do if he entered into a contract on the basis of the law and the known tax liabilities which he knew he could satisfy? Suddenly his liability has been retrospectively increased; he cannot pay it because his funding did not allow for it. The emergence of this liability puts him in breach of his covenants with lenders and he is at serious risk of losing his business or his home. If you want a definition of conduct which is “repugnant”, look no further.
The proposal is that if anybody had tried to lock in their entrepreneurs relief by an unconditional contract entered into before Budget day, with completion taking place after Budget day, they are going to be in trouble.
They are going to have to demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in Section 28 TCGA 1992 which provides that the date of the contract – not completion – is the date of disposal; and if the parties to the contract were connected, the contract must have been entered into for wholly commercial reasons.
When somebody makes a claim to entrepreneurs relief, they must make an additional claim which includes a statement or declaration that the contract was not entered into with the purpose of obtaining a capital gains tax advantage by reason of the application of Section 28. This may require a declaration to be made jointly with trustees where there was a disposal by a trust.
There are further provisions which apply where there has been a share for share exchange and an election under Section 169Q TCGA 1992 to disapply the rules under Section 127 that such a share for share exchange would not be a disposal for capital gains tax.
Where advance clearance has been received from HMRC that the motive test in section 137 is satisfied in respect of a share exchange that took place prior to Budget day, that would not provide any protection if an election is made under Section 169Q, to disapply the no disposal rule.
