Capital Gains Tax: Entrepreneurs’ Relief: minimum qualifying period extension
Updated 30 October 2018
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Who is likely to be affected
Individuals who dispose of all or part of their business; individuals who dispose of shares in their personal company on or after 6 April 2019. Trustees who dispose of trust business assets.
General description of the measure
The measure increases this minimum period throughout which certain conditions must be met to be eligible for Entrepreneurs Relief from one year to 2 years. There are special provisions for cases where the business ceased before 29 October 2018.
Policy objective
The measure improves the effectiveness and value for money of Entrepreneurs’ Relief by requiring claimants to have an interest in their business for a longer period of time.
Longer term involvement is more characteristic of true entrepreneurial activity as distinct from simple investment or speculation. This is part of the government’s policy of supporting enterprise.
Background to the measure
The measure was announced at Budget 2018.
Detailed proposal
The measure will have effect for disposals on or after 6 April 2019, except where a business ceased before 29 October 2018.
Where the claimant’s business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group), before 29 October 2018, the existing one year qualifying period will continue to apply.
Operative date
The measure will have effect for disposals on or after 6 April 2019, except where a business ceased before 29 October 2018. Where the claimant’s business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group), before 29 October 2018, the existing one year qualifying period will continue to apply.
Current law
Current law is included in chapter 3 of part 5 Taxation of Chargeable Gains Act 1992, specifically sections 169I, 169J, 169K and 169O.
Proposed revisions
Legislation will be introduced in Finance Bill 2018-19 to amend sections 169I, 169J, 169K and 169O and the Taxation of Chargeable Gains Act 1992, which specify periods throughout which conditions must be met in order for relief to be due. The periods will increase from one year to 2 years:
- section 169I(3) will be amended so that where a claimant has disposed of a business or part of a business, he must have carried on that business for 2 years ending at the time of the disposal
- section 169I(4) will be amended so that where a claimant has disposed of an asset used at the time the business ceased, the business must have been carried on by the claimant for 2 years
- subsections (6), (7), (7A) and (7B) of section 169I will be amended so that where a claimant has disposed of shares in a company, the qualifying conditions in relation to companies must have been met for 2 years ending at the time of the disposal
- section 169K will be amended so that where a claimant has disposed of an asset used in a business after disposing of the business (a ‘disposal associated with a relevant material disposal’), that asset must have been used in the business for 2 years
- sections 169J and 169O will be amended so that the qualifying conditions in relation to trust business assets must have been met for 2 years
Transitional rules will apply where the claimant’s business ceased before 29 October 2018, so that the old one year period will continue to apply to claims on disposals of assets within 3 years of cessation. The business will need to have been carried on for only one year prior to cessation (paragraph 4 of the schedule).
Where the claimant’s personal company ceased to be a trading company (or the holding company of a trading group) before 29 October 2018 the old one year period will continue to apply to disposals of shares within 3 years of cessation. The company will need to have been a trading company (etc) for only one year prior to cessation.
New subsections (7ZA) and (7ZB) of section 169I will provide that where the claimant disposes of shares in their personal company which they received as consideration for transferring their business to the company, the measure will provide for the pre-transfer period to be taken into account in deciding whether the new 2 year qualifying period condition is met.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| nil | +5 | +10 | +75 | +80 | +90 |
These figures are set out in Table 2.1 of Budget 2018 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
Economic impact
This measure is not expected to have any significant macroeconomic impacts. A behavioural adjustment is made for taxpayers holding onto their assets for longer in order to meet the new criteria.
Impact on individuals, households and families
This measure will impact on an estimated 3,000 individuals who sell either all or part of their business, or shares in a company in which they hold an office or employment.
These individuals will lose their entitlement to relief and will have to pay more Capital Gains Tax on their gain if they have not carried on the business or held the necessary interests in their company for 2 years.
One off costs include familiarisation with these new rules. It is not expected that there will be any on-going costs.
The measure is expected to have a negligible indirect negative impact on family formation, stability and breakdown as a result of a higher rate of tax being payable in some circumstances.
Equalities impacts
Entrepreneurs’ relief claimants tend to be male and of above average means, and include individuals who are selling their business or their company’s shares on retirement.
People withdrawing from business activities which they have carried on for a short time are likely to be most affected by this measure.
It is not anticipated that there will be impacts on other groups sharing protected characteristics.
Impact on business including civil society organisations
This measure will impact on sole traders, partnerships and some limited companies. Individuals carrying on businesses, or holding shares in their personal companies, will have to have done so for 2 years (rather than one year) before being eligible for relief on disposals.
One off costs include familiarisation with these new rules. The measure is not expected to have any impact on businesses’ ongoing administrative burdens. There is no impact on civil society organisations.
There is no specific impact on small and micro businesses.
Operational impact (£m) (HMRC or other)
There will be no significant operational impact on HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax receipts.
Further advice
If you have any questions about this change, contact Leah White on telephone: 03000 530 279 or email leah.white@hmrc.gsi.gov.uk.