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TAXguide 04/19: Entrepreneurs’ relief: clarification of the new 5% proceeds test

This TAXguide sets out a series of questions raised by the Tax Faculty with HMRC in order to explore the changes made to entrepreneurs’ relief, introduced in Finance Act 2019. HMRC’s replies are set out in full in this TAXguide.

TAXguide 04/19

Tax Faculty members can download this guidance in full.

Finance Act 2019 (FA 2019) amended the definition of what constitutes a “personal company” for the purposes of entrepreneurs’ relief (ER). Those amendments took effect, broadly, for disposals on or after 29 October 2018.

The stated policy objective behind the amendments was to ensure “…that the claimant has a true material stake in business in order to claim entrepreneurs’ relief.”

Initially, the provisions of Finance Bill 2018/19 (which became FA 2019) inserted only one new “economic interest” test into the definition of personal company. This test focused on the taxpayer’s entitlement to both distributable profits and assets on a winding up. However, the consequences of having to meet this test were perhaps wider than originally intended and a second, alternative economic interest test was introduced shortly before Christmas 2018. This second test focuses on entitlement to sale proceeds.

It is now a requirement that, in order to be a personal company for the purposes of ER, one or other of these two economic tests must be met throughout the relevant period (2 years for disposals on or after 6 April 2019).

The wording of the second economic interest test and its interaction with the relevant period can lead to some complexity.

The Tax Faculty has therefore raised a series of questions with HMRC in order to explore these complexities. HMRC’s replies are set out in full in this TAXguide. These responses are published with both the approval of HMRC and ICAEW’s thanks to HMRC for their engagement.