Anti-avoidance Clampdown on Entrepreneurs’ Relief - Joint Ventures and Partnerships : measure affects disposals on and after 18 March 2015

Anti-avoidance Clampdown on Entrepreneurs’ Relief – Joint Ventures and Partnerships : measure affects disposals on and after 18 March 2015

Thu 19 Mar 2015

The Budget introduces changes to Capital Gains Tax: entrepreneurs’ relief that will affect individuals who wish to benefit from entrepreneurs’ relief (ER) on capital gains tax (CGT) without holding at least a 5% stake directly in a company carrying on a trade.

This new measure will deny ER on a disposal of shares in a company that is not a trading company in its own right. The measure takes immediate effect and will affect disposals on and after 18 March 2015. 

The measure blocks planning which was sometimes introduced to preserve or obtain ER  that was not otherwise available.

This new anti-avoidance measure is aimed at closing an ER loophole around joint ventures which have been used to set up structures under which individuals with only a small indirect stake in the trading company could benefit from ER. 

This planning has been judged to be against the policy intention, which is that individuals must have a significant stake in a genuine trading business in order to benefit from ER.  

This new measure is effective immediately in relation to disposals on and after 18 March 2015 although the draft Finance Bill 2015 legislation will only be published on 24 March 2015.  

Information released today states that the policy intention is to ensure that those who benefit from ER have a 5% directly-held shareholding in a genuine trading company. The new measure therefore does not affect shareholdings in companies whose investment in a joint venture is part of their own trade.  

The current position:

The ER provisions are at sections 169H to 169S of the Taxation of Chargeable Gains Act 1992 (TCGA). ER reduces the rate of CGT on the disposal of assets to 10% from the standard 18% (for basic rate taxpayers) or 28% (for higher and additional rate taxpayers).  

One of the eligibility conditions for ER to be claimed in respect of a disposal of shares is that the shares must be in a ‘trading company or the holding company of a trading group’. The relevant terms are defined at section165A of TCGA such that “trading company” means a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities” and “holding company” means a company that has one or more 51% subsidiaries. 

“Trading activities” means activities carried on by the company:

  1. in the course of, or for the purpose of, a trade being carried on by it;
  2. for the purpose of a trade that it is preparing to carry on;
  3. with a view to its acquiring or starting to carry on a trade; or
  4. with a view to its acquiring a significant interest in the share capital of another company that –
  • is a trading company or the holding company of a trading group; and
  • if the acquiring company is a member of a group of companies, is not a member of that group.

In terms of the acquisition of a ‘significant interest’ this requires the shares to be ordinary share capital such that the acquired company becomes a 51% subsidiary or the acquired interest is such as would give the acquiring company a qualifying holding in a joint venture company without making the two companies members of the same group of companies. 

The proposed changes:

Legislation will be introduced in Finance Bill 2015 to amend TCGA so that for ER purposes the definitions of a ‘trading company’ and ‘the holding company of a trading group’ do not take account of activities carried on by joint venture companies which a company is invested in, or of partnerships of which a company is a member. 

Therefore a company would need to have a significant trade of its own in order to be considered as a trading company. This measure might therefore impact, for example, individuals who own shares in a shell management company which holds an investment in a joint venture. 

We await publication of the draft legislation on 24 March for more details.

Author: Liz Hunter 






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