Muras Matters: Budget 2020 – Changes to Entrepreneurs’ Relief


Since the election in December it had been anticipated that changes to Entrepreneurs’ Relief were likely in the Budget with many speculating the relief would be removed altogether. Last week the Chancellor of the Exchequer, Rishi Sunak, announced that Entrepreneurs’ Relief lifetime limit would reduce to £1 million from the previous limit of £10 million.

The reduction in the lifetime limit was introduced in the Budget with immediate effect.


The decrease in lifetime limit for Entrepreneurs’ Relief (“ER”) from £10 million per person to £1 million takes effect for disposals on or after 11 March 2020. It should be remembered however that ER is still a very valuable capital gains tax (“CGT”) relief for many. Provided the right circumstances are satisfied then a 10% CGT rate will apply to a disposal qualifying for ER.

Whilst ER can also apply to a sole trader or partner in a partnership selling the whole or part of their business, we thought it would useful to remind shareholders in limited companies of the main conditions that will need to be satisfied in order to secure the relief.

Significant trading activity

The shares in question must be shares in a trading company. If the company carries out non-trading activities to a ‘substantial’ extent, it may prejudice a claim to ER. HM Revenue & Customs has gone on record to say that they consider ‘substantial’ to mean more than 20%. The 20% test can be applied to various things such as turnover, total assets and the proportion of time spent on non-trading activities. The company must be looked at ‘in the round’ rather than focusing on one particular item.

5% or more in shares

In order to qualify for ER the company must be an individual’s ‘personal company’ throughout the 24 months prior to sale.

A company is an individual’s personal company if it meets the following criteria. The individual’s holding:

  • constitutes at least 5% of the ordinary share capital of the company
  • beneficially entitles them to 5% of voting rights, and either:
    • beneficially entitles them to at least 5% of the profits available for distribution to equity holders and 5% of assets on a winding, or
    • beneficially entitles them to at least 5% of proceeds on the disposal of all of the ordinary share capital of the company

There is no aggregation of shares held by spouses so where relevant it is important to ensure both husband and wife each hold the minimum shareholding in their own right.

It is not uncommon for a company to have additional classes of shares which all need to be taken into account when considering whether the requisite conditions are met.

Shareholder must be an employee

The shareholder must be an officer or employee of the company up to the point of sale. If shares are passed to a non-working spouse pre-sale or are being disposed of by an employee after retirement for example they will not qualify for ER. It is important to note however that there is no requirement for employment to be on a full time basis.

24 month qualifying period

For normal share sales all of the above conditions must be satisfied throughout the 24 months up to the date of disposal. Again shares passed to a spouse or other family members pre-sale with a view to taking advantage of their annual exemptions or lower tax bands will not qualify unless the 24 month test has been met.

When contemplating any business or share disposal the availability of ER is likely to be one of the key issues. As indicated there can be many pitfalls and early consideration of the key factors is crucial so that planning opportunities may be identified in good time.

It is also important to point out that there is a time limit for claiming ER and failure to meet this deadline could be a costly mistake.

If you would like more information about Entrepreneurs’ Relief or how the changes in the Budget may affect you please contact our Tax Director, Jenny Marks.

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