At Budget 2020 the Chancellor of the Exchequer announced that the lifetime limit of entrepreneurs’ relief (ER) would be reduced from £10 million to £1 million for ER qualifying disposals made on or after 11 March 2020.
Rules will also apply the revised limit to certain arrangements and elections that seek to apply the earlier £10 million lifetime limit. These rules are:
– forestalling arrangements involving uncompleted contracts; and
– elections made under TGCA 1992, s 169Q in connection with a share reorganisation or exchange.
There are no transitional rules for disposals that take place after 11 March 2020, including where:
– negotiations were in progress up to 11 March 2020 but a contract for the disposal is entered into on or after 11 March 2020;
– the business ceased to trade prior to 11 March 2020;
– the disposal is ‘associated’ with an earlier disposal; or
– the gain is a deferred gain that accrues on a chargeable event on or after 11 March 2020.
The legislation contains rules that counter certain forestalling arrangements that seek to ‘lock-in’ to the pre-Budget day lifetime limit. Those arrangements make use of:
– unconditional contracts entered into before Budget day,
– the time of disposal rule at section 28(1) of TCGA 1992, and
– contractual completion of the disposal after Budget day.
The arrangements normally include the creation of a company or other vehicle that ‘stands on contract’ until such time as a further purchaser is found.
The rule being introduced maintains the date of disposal for the contracts but applies the new lifetime limits to these disposals unless:
1. The parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in TCGA 1992, s 28; and
2. Where the parties to the contract are connected, that the contract was entered into for wholly for commercial reasons;
and a claim is made.
Company reconstructions and elections under TCGA 1992, s 169Q
Shareholders in a company may not be treated as making a disposal of their shares when the shares are exchanged for alterative shares in the company or those in another company. However, section TCGA 1992, s 169Q allows, on election, a claim for ER to be made as if the exchange involved a disposal of the original shares for capital gains purposes.
Special rules will apply where an election under section 169Q is made following a share reorganisation or share exchange. The effect of these rules is that the new lifetime limit will apply to gains that result from the making of the election.