This Government has been clear on its aim to tackle national and international tax avoidance, particularly by corporates. The budget last week reinforced this position introducing further measures to try and combat tax avoidance.
One unexpected change was to the rules around entrepreneurs’ relief. Entrepreneurs’ relief is a relief from capital gains tax (CGT) that allows individuals selling shares who comply with various conditions to reduce their CGT rate to 10%. With effect from 18 March the rules have been tightened with a potential impact on existing management equity structures.
This change will affect individuals holding shares in companies (sometimes known as management companies or “Mancos”) that in turn hold 10-50% of shares in a trading company or holding company of a trading group. Prior to the budget changes, the Manco was able to be treated as a trading company, which in principle allowed individuals to comply with the requirement to hold 5% of share capital and voting power to qualify for entrepreneurs’ relief on a disposal of the shares in the Manco.
The Government has now closed this planning. It is now no longer possible to treat such a Manco as a trading company (unless it genuinely carries on a separate trade). Therefore, any shareholder within the UK CGT net who has not yet disposed of their shares in such a Manco (or the underlying trading asset) will now have to pay the full rate of CGT at 28% rather than the reduced 10% rate under entrepreneurs’ relief.
The Finance Bill 2015 makes the amendment clear and closes the door on existing Manco structures, unless there has been a disposal of the Manco or the underlying trading asset before 18 March 2015. Existing groups with Mancos will need to consider other planning.
As well as being an unexpected change in view of HMRC’s previously perceived acceptance of Manco structures, these changes also have an unfortunate knock on effect for those individuals holding shares in a genuine joint venture, unless that joint venture is itself performing a trade or the holding company of a trading group. Despite concerns raised over this consequence of the changes it is unlikely that the Finance Bill will be amended. Such groups will therefore also need to consider other planning.
If you would like to discuss your current planning or have any questions about these changes please contact a member of the Osborne Clarke Tax team.
For our further thoughts on the budget please click here.