There are three significant changes to current rules, the first of which on definition of a personal company, will take immediate effect while the other proposals will be included in Finance Bill 2018-19 and will be consulted on, with planned introduction from April 2019.

Definition of a personal company

The first proposal affects the definition of a personal company and comes into effect immediately. This will apply where the disposal is of shares in a trading company or the holding company of a trading group. One of the requirements is that the company is the individual’s personal company.

The definition of personal company will be expanded to add a requirement that the shareholder must have a 5% interest in the distributable profits and net assets of the company for the relief to be available.

This is in addition to the existing requirements that the shareholder holds at least 5% of the share capital and that shareholding entitles them to at least 5% of the voting rights and that the individual is an employee or office holder of the company.

This change will apply to disposals on or after 29 October 2018, in other words with immediate effect.

Qualifying conditions

The second change will be that the qualifying conditions in all cases must be met for two years to the point of disposal or the cessation of trade. The previous rule allowed a 1-year qualifying period.

This is to apply to disposals on or after 6 April 2019. However, an element of protection has been put in place where businesses ceased prior to 29 October 2018. The 1-year qualifying period will be preserved.

Shareholdings

The third change will apply where a shareholding is diluted to fall below 5% where, prior to the dilution, the shareholding was greater than 5%.

This will be subject to a genuine commercial reasons test. This would exclude, for example debt for equity swaps or the exercise of employee share options.

Entrepreneur’s relief would be retained on the growth in the shares up to the point of dilution. A deemed disposal will arise. However, it will be possible for the shareholder to elect for the notional gain to be deferred until the shares are actually sold.

This will apply in respect of shares held at the time of fund raising events on or after 6 April 2019.

Note: this article is based on Budget 2018 proposals and will not be law until the 2018-19 Finance Bill is enacted. It is, of course, possible that the proposals and legislation could be amended during any subsequent consultation and the passage of the Finance Bill through parliament.

About the author

John Riseborough, tax adviser at Croner Taxwise advice lines Tel: 0844 892 2470. 

This article first appeared in Tax Question of the Week by Croner Taxwise