In a surprise move, entrepreneurs’ relief will be extended to long term investors in unlisted companies. This will provide a 10% rate of CGT for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016, and subject to a separate lifetime limit of £10m of gains. This measure will cost an estimated £125m over this parliament.

A number of backdated measures to change the treatment of capital gains tax (CGT) through an extension of entrepreneurs' relief on associated disposals and goodwill on incorporation were also announced. This  u-turn on the government’s earlier rigid view on potential abuse of ER is expected to make it easier to pass on businesses as going concerns within a family and is particularly for farming businesses.

The  follows recognition by the government that a crackdown on the abuse of entrepreneurs relief in the March 2015 Budget, which came in for criticism as it was too wide-ranging and captured legitimate tax planning, went too far.

The changes to disposals and goodwill will be backdated to the date on which the Finance Act 2015 measures became effective on 26 March 2015. They will therefore apply to associated disposals on or after 18 March 2015.

The first change allows entrepreneurs’ relief to be claimed on an ‘associated disposal’ of a privately-held asset when the accompanying disposal of business assets is to a family member. This applies to individuals who realise gains on a disposal of a private asset, used in a business carried on by their partnership or company when they retire or reduce their participation in their business.

Relief can also be claimed in some cases where the disposal of business assets does not meet the present 5% minimum size condition.

Legislation will be introduced in Finance Bill 2016 to change the definitions of ‘partnership purchase arrangements’ and ‘share purchase arrangements’ for entrepreneur’s relief purposes by excluding:

1. the material disposal itself; and
2. arrangements which pre-date both the material disposal and the associated disposal, and are independent of them.

The requirement that the material disposal of business assets is of 5% or more of the claimant’s share in a partnership or holding in a company does not apply where the claimant disposes of the whole of his interest and has previously held a larger stake.

At the same time, the government announced a change in the rules to extend availability of entrepreneurs’ relief on goodwill on incorporation. This applies to individuals (including partners in a firm) who transfer their business to a close company and become or remain a participator in the acquiring company.

The measure allows entrepreneurs’ relief to be claimed, subject to certain conditions, on gains on the goodwill of a business when that business is transferred to a company controlled by five or fewer persons or by its directors.

Commenting on the introduction of the £10m lifetime business investment allowance, Craig Hughes, director and tax specialist at accountancy firm Menzies LLP said: ‘This sounds like the beginning of a deregulation of entrepreneur’s relief, which similarly offers a £10m allowance taxed at 10%.

'While on the face of it, this seems a generous move, let’s not forget that EIS (Enterprise Investment Scheme) allows for a tax free exit on short-term business investments. I am not sure this will actually have much of a positive impact on business investment, but time will tell.’

The move could offer an alternative channel for investors who are unable to use existing investment relief schemes. Deloitte private markets partner, Tom Evennett, said: ‘Entrepreneurs that cannot raise funds under the current EIS or SEIS [Seed Enterprise Investment Scheme] regimes may benefit by this measure, as will individual investors wishing to invest in excess of the limits in qualifying businesses.’

Michael Steed, president of the ATT welcomed the measure but cautioned: 'It will be interesting to see whether this extension to entrepreneurs’ relief for external investors prompts a shift away from EIS and SEIS. Much will inevitably depend on the how the legislation is structured and on the complexity of anti-avoidance provisions.

'If the provisions can be kept simple, they have the potential to provide a very attractive alternative to EIS and SEIS.'

The move was welcomed by the Quoted Companies Alliance as a major tax boost for AIM and private company investors, although it would have liked to see the measure extended beyond the larger investors.

Neil Pamplin, chairman of the Quoted Companies Alliance’s tax expert group and partner at Grant Thornton UK LLP, said: ‘Our proposals called for a broadening of the scope of entrepreneurs’ relief to include investment by other employees and external investors.

‘The Chancellor has given this relief to external investors, which we welcome. However, to further encourage wider share ownership, we would like to see this extended to employees who own less than 5% of a company. They too take a high risk when investing in growth companies.’

The government will also allow entrepreneurs relief to be claimed in some cases involving joint ventures and partnerships where the disposal of business assets does not meet the existing 5% minimum holding conditions. These changes will take effect for disposals made on or after 18 March 2015. This measure will be legislated for in Finance Bill 2016.

In a separate move, the government will review the definition of a trading company for entrepreneurs relief purposes to ensure that it operates effectively.

Related TIINs and technical HMRC documentation

The TIIN on Capital Gains Tax: changes to rules to extend availability of entrepreneurs’ relief on associated disposals is available here

The TIIN on CGT: changes to rules to extend availability of Entrepreneurs’ Relief on goodwill on incorporation is available here