Finance Act 2020 rebranded entrepreneurs’ relief (ER) to business asset disposal relief (BADR) perhaps in an attempt to deflect some of the criticism that the relief had not encouraged entrepreneurial activity. The rebrand has no practical impact on the operation of the relief but more significant changes in FA 2020 to ER/BADR, which took effect for disposals on or after 11 March 2020, will have a significant impact on business owners, many of whom may have brought forward their exit plans due to the current COVID-19 crisis.
For those involved in the preparation of SA tax returns for 2019/20, the changes may also impact on CGT calculations. The most significant change was the reduction in the lifetime limit from £10m to £1m for disposals on or after 11 March 2020 which will have been particularly hard on those medium sized business owners who were in the process of disposing of their business. For those who were facing significant capital gains of £10m, the changes mean an increase in tax of £900,000.
There was a lot of speculation before the March 2020 budget that ER might be abolished and this led to some considering planning opportunities centred around ‘banking’ ER and the previous £10m lifetime level. To counter this, FA 2020 includes anti-forestalling provisions aimed at blocking transactions which were undertaken to ‘lock in’ some, if not all, the £10m lifetime limit. These measures were outlined in our earlier article or 15 April 2020 and are outlined in brief below:
Unconditional contracts
This measure involves the disapplication of s 28(1) TCGA 1992, which fixes the CGT disposal date despite the contract being uncompleted. Where the anti-avoidance applies, the disposal date will be the date the contract is completed which could be after 11 March 2020, where the new £1m lifetime limit applies. This disapplication of s 28 applies to unconditional contracts entered into on or after 6 April 2019 where completion takes place on or after 11 March 2020, unless one of the following conditions is met:
One
-
the parties to the contract are not connected persons,
-
no purpose of entering into the contract was to obtain an advantage by reason of the application of s 28(1) of TCGA 1992, and
-
the person making the disposal makes a claim which includes a statement that the condition in paragraph (b) is met
Two
-
the parties to the contract are connected persons,
-
the contract was entered into wholly for commercial reasons,
-
no purpose of entering into the contract was to obtain an advantage by reason of the application of s 28(1) of TCGA 1992, and
-
the person making the disposal makes a claim which includes a statement that the conditions in paragraphs (b) and (c) are met
Share reorganisations
The anti-avoidance rules prevent the use of the election under s 169Q to dis-apply a share reorganisation under s 127 TCGA 1992, aimed at triggering a disposal before the reduction in the lifetime limit. The anti-forestalling has the effect of making such an election effective from the date it is made which may be after 11 march 2020 where the new £1m lifetime limit applies.
The rules apply to share reorganisations between 6 April 2019 and 11 March 2020. As the deadline for making elections under s 169Q is the anniversary of the 31 January following the tax year of disposal it would still be possible to make effective elections to maximise ER for disposals during the tax year ended 5 April 2019.
Exchange of securities
The anti-forestalling rules apply where shares have been exchanged for those in another company on or after 6 April 2019 but before 11 March 2020. They were aimed at transactions looking to bank ER which included interposing a new holding company and the disapplication of the share reorganisation rules. They apply where:
-
immediately after the exchange, the relevant shareholders of company B (acquiring company) are substantially the same as those in company A (target company) or those shareholders that controlled company A now control company B; or
-
immediately after the exchange, the relevant shareholders holding the shares or securities in company B hold a greater percentage of the ordinary share capital in B than they did in a company A. And on 11 March 2020:
-
company B is the relevant individual’s personal company, and is either (i) a trading company or (ii) the holding company of a trading group, and
-
the relevant individual is an officer or employee of company B or (if the company is a member of a trading group) of one or more companies which are members of the trading group
Where the anti-forestalling applies, if an election is made under s 169Q on or after 11 March 2020 then the share disposal is treated as taking place at the time of the election and not at the time of the share for share exchange, meaning that the reduced lifetime limit of £1m will apply. Again the rules apply to transactions after 6 April 2019 so earlier transactions may not be effected.
Practitioners will need to consider the applications of these anti avoidance rules when reviewing CGT disposals and ER/BADR claims.
As for the future, speculation is growing as to whether BADR will continue to survive as changes to the tax system will no doubt be introduced to order to recover revenues exhausted from the COVID-19 crisis. Some clients may want to factor this possibility into their exit plans. Any capital gains falling outside eligibility for BADR will generally be taxed at 20% which is still relatively low compared to income tax rates but again some speculation is that this may also change.
For further information about BADR and capital gains tax in general, please contact Martin Mann by email or call us on 0370 218 5278.
Our COVID-19 Hub contains a range of information and resources to best support our clients during this difficult time. To receive the latest news and insights by email sign-up here.