Budget 2015 - Entrepreneurs' Relief - Man Cos will not work
Entrepreneurs' relief ("ER"), where it applies, provides an effective 10% rate of CGT on disposals on the first £10m of lifetime gains. The attraction of a 10% rate has led to structures designed to
Entrepreneurs' relief ("ER"), where it applies, provides an effective 10% rate of CGT on disposals on the first £10m of lifetime gains. The attraction of a 10% rate has led to structures designed to access ER where, without such structure, the ER conditions would not be met. In the context of share sales, broadly, ER may apply where the individual seller holds 5% or more of the votes and share capital in the target company which is a trading company or a member of a trading group, and is an officer or employee of that or a group company (there are also rules around how long the shares have been held).
Until yesterday, a trading company could include a company which was not itself a trading company but which held at least a 10% interest in a joint venture company which was a trading company. In effect a portion of the trade of the JV company would be treated as a trade of the first company, making that first company a trading company.
Structures developed under which a management company (or ManCo) was established, in which individuals held shares, which in turn held 10% of the shares in an underlying trading company. In that way, the managers could hold more than 5% of the ManCo, which was deemed a trading company, even though, had they held shares directly in the underlying company, they would not have passed the 5% ER shareholding threshold.
With effect for disposals made on or after 18 March 2015, the joint venture deeming provision described above will be repealed.
This will affect existing ManCo structures, probably rendering them ineffective (subject to the detailed facts).
It will also affect other existing corporate structures which happen for commercial reasons to involve joint ventures, irrespective of whether or not those structures derive from tax planning. It is not uncommon for individuals to hold interests in trading companies through their own companies. In those circumstances, ownership structures should be reviewed carefully in the light of the new changes.
Finally, the Budget Tax Note introducing the change was written confusingly and in some places suggested that any non-trading holding company (even with a grouped (rather than JV) trading subsidiary) would prevent the holding company shareholders from qualifying for ER. Some other commentators have remarked on this. Looking at the Budget Tax Note as a whole, it is only targeting the rules allowing non-trading companies to be deemed trading for ER purposes by reason of 10% or more holdings in non-grouped JV companies. This is supported by the draft legislation.
Here is a link to the Budget Tax Note.
Until yesterday, a trading company could include a company which was not itself a trading company but which held at least a 10% interest in a joint venture company which was a trading company. In effect a portion of the trade of the JV company would be treated as a trade of the first company, making that first company a trading company.
Structures developed under which a management company (or ManCo) was established, in which individuals held shares, which in turn held 10% of the shares in an underlying trading company. In that way, the managers could hold more than 5% of the ManCo, which was deemed a trading company, even though, had they held shares directly in the underlying company, they would not have passed the 5% ER shareholding threshold.
With effect for disposals made on or after 18 March 2015, the joint venture deeming provision described above will be repealed.
This will affect existing ManCo structures, probably rendering them ineffective (subject to the detailed facts).
It will also affect other existing corporate structures which happen for commercial reasons to involve joint ventures, irrespective of whether or not those structures derive from tax planning. It is not uncommon for individuals to hold interests in trading companies through their own companies. In those circumstances, ownership structures should be reviewed carefully in the light of the new changes.
Finally, the Budget Tax Note introducing the change was written confusingly and in some places suggested that any non-trading holding company (even with a grouped (rather than JV) trading subsidiary) would prevent the holding company shareholders from qualifying for ER. Some other commentators have remarked on this. Looking at the Budget Tax Note as a whole, it is only targeting the rules allowing non-trading companies to be deemed trading for ER purposes by reason of 10% or more holdings in non-grouped JV companies. This is supported by the draft legislation.
Here is a link to the Budget Tax Note.