Budget 2016 has extended Entrepreneurs tax relief to long term investors in unlisted trading companies. This new measure could approve attractive to commercial and residential property developers as the need to be a qualifying trade has been removed.
Entrepreneurs Tax Relief Rate
This relief will apply a 10% rate of capital gains tax to gains accruing on the disposal of ordinary shares in unlisted trading companies or unlisted holding companies of trading groups held by individuals that:
- were newly issued to them and acquired on or after 17th March 2016
- were obtained for genuine commercial purposes and not for tax avoidance purposes
- have been held for at least three years from 6th April 2016
- will be subject to a lifetime limit of £10M gains to qualify for this investor relief
Section 3 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that individuals pay capital gains tax on their chargeable gains net of allowable losses and all other reliefs that exceed the annual capital gains tax exempt amount currently £11,100 for the tax year ended 5th April.
Ordinary shares are assets for the purposes of Section 21 TCGA and gains on disposals of such assets are subject to capital gains tax at a rate of either 18% (basic rate taxpayers) or 28% (higher rate taxpayers) reduced by Budget 2016 to 10% or 20%. However, where shares qualify for entrepreneurs tax relief the first £10M of gains accrued on disposal of shares in a trading company by an individual who has worked for the company and owned at least 5% of the ordinary shares in the company are taxed at the rate of 10% capital gains tax.
The need to be an employee and hold at least 5% of the unlisted trading companies shares has been removed for the application of the new relief outlined above.