Capital Gains Tax: Entrepreneurs’ relief: definition of a ‘personal company’
Updated 29 October 2018
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This publication is available at https://www.gov.uk/government/publications/changes-to-personal-company-tests-for-entrepreneurs-relief/capital-gains-tax-entrepreneurs-relief-definition-of-a-personal-company
Who is likely to be affected
Individuals who, on or after 29 October 2018, realise gains on disposals of shares in a company by which they are employed or in which they hold an office.
General description of the measure
The measure adds 2 new tests to the definition of a ‘personal company’, requiring the claimant to have a 5% interest in both the distributable profits and the net assets of the company. The new tests must be met, in addition to the existing tests, throughout the specified period in order for relief to be due.
Policy objective
This measure ensures that the claimant has a true material stake in business in order to claim entrepreneurs’ relief. Having such an interest is characteristic of true entrepreneurial activity (as distinct from simple investment or employment), so the measure ensures that allowable claims are limited to those which are within the spirit of the relief. This is part of the government’s policy of supporting enterprise.
Background to the measure
The measure was announced at Budget 2018.
Entrepreneurs’ relief reduces the amount of Capital Gains Tax paid on disposals of businesses, or shares in a personal company, by offering a reduced 10% tax rate on up to £10 million worth of lifetime gains.
Detailed proposal
Operative date
The measure will have effect for disposals on or after 29 October 2018.
Current law
Current law for entrepreneurs’ relief is included in Chapter 3 of Part 5 Taxation of Chargeable Gains Act 1992, in particular at section 169S.
Proposed revisions
Legislation will be introduced in Finance Bill 2018-19 to add 2 new conditions to the definition of an individual’s personal company in section 169S(3). Both conditions, as well as the existing ‘share capital’ and ‘voting rights’ conditions must be met. The new conditions require the individual to be beneficially entitled to at least:
- 5% of the company’s distributable profits
- 5% of its assets available for distribution to equity holders in a winding up
References to the company include any other company which is a member of the same group.
The same 2 new conditions are added to:
- the conditions for relief on associated disposals in section 169K(1B), so that they must both be met in relation to a material disposal consisting of shares before an associated disposal of an asset can qualify for relief
- the conditions for the withholding of relief on goodwill at section 169LA(1), so in addition to the existing 2 conditions, if either of the new conditions is met following a disposal of goodwill to a close company, then relief will not be due
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| nil | +5 | +10 | +10 | +10 | +15 |
These figures are set out in Table 2.1 of Budget 2018 as ‘Capital Gains Tax: definition of a personal company within Entrepreneurs’ Relief’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure will impact fewer than 1,000 individuals who sell shares in a company in which they hold an office or employment. Where individuals do not hold the necessary 5% economic interests in their company for the specified time, they will lose their entitlement to relief and will have to pay more Capital Gains Tax on their gain.
The measure is expected to have a negligible indirect negative impact on family formation, stability and breakdown as a result of a higher rate of tax being payable in some circumstances.
Equalities impacts
This measure will affect those with protected characteristics represented in higher income groups.
Impact on business including civil society organisations
This measure will impact on personal companies. In order to claim relief on share disposals, individuals who are employed by the company whose shares they have disposed of must have a 5% interest in both distributable profits and net assets of that company. The measure is not expected to have any impact on businesses’ administrative burdens. There is no impact on civil society organisations.
There is no specific impact on small and micro businesses.
Operational impact (£m) (HMRC or other)
There will be no significant operational impact on HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax receipts.
Further advice
If you have any questions about this change contact Leah White on telephone: 03000 530 279 or email: [email protected].