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Banking the £10M entrepreneurs’ relief allowance

A tax-saving opportunity is available to individuals who sold their shares in a trading company during the period from 6th April 2018 to 10th March 2020 for consideration which included shares or loan notes issued by the purchaser, but urgent action is required as there is a 31 January deadline for making claims.

The background to the opportunity is that, as well as re-naming entrepreneurs’ relief (ER) as business asset disposal relief (BADR), Finance Act 2020 also reduced the lifetime allowance from £10M to £1M for disposals taking place on or after 11 March 2020. BADR (formerly ER) gives a 10% tax rate on qualifying disposals, compared to the usual CGT rate of 20%.

The reduction could have a particularly negative impact on sellers who received loan notes or shares in the purchaser and had chosen to defer the gain under the share exchange rules, with the expectation that they would be able to make use of BADR when the loan notes were eventually repaid or the new shares were sold. The reduction in the lifetime limit could mean that such gains will now be taxable at 20% rather than 10%, or at even higher rates if CGT rates increase in future.

Where ER was available on the original sale, it is possible to elect to “opt-out” of the share exchange rules and instead trigger the gain on the loan note and share consideration as arising on the date of the original sale. This will bring forward the date of payment of tax, but in the right circumstances will allow the full £10M allowance to be accessed, rather than the new £1M allowance. The election will result in an uplift in the CGT base cost of the loan notes or new shares, therefore reducing or even eliminating the tax that will be payable when those loan notes are repaid or shares are sold.

The deadline for making an election to “opt-out” and trigger the gain is 31 January 2021 for share exchanges taking place during the year ended 5 April 2019, and 31 January 2022 for share exchanges taking place during the year ended 5 April 2020.

It should be noted that, once an election has been made, the tax will be payable regardless of whether or not the loan notes are eventually repaid or the new shares fall in value. There are also anti-forestalling rules which apply to certain exchanges taking place on or after 6 April 2019, but these rules do not affect exchanges during the year ended 5 April 2019.

Please contact your usual BHP tax contact if you wish to explore the planning in more detail, or contact Mark Cooper at mark.cooper@bhp.co.uk.