Entrepreneurs Relief – the Government’s second attempt

Wed 16 Mar 2016

Some restrictions on Entrepreneurs Relief (ER) introduced last year have been lifted in part this year, backdated to last year.  Didn’t think it through the first time round.

Restrictions were introduced last year to the definition of trading company so as to remove the attribution of the trading activity of an underlying joint venture investment to the investing company. As a result the joint venture would no longer contribute to the trading activity of the investing company but would be an investment activity. The real target was to remove some planning aimed at accessing ER by consolidating let us say 5 x 4% management holdings in a company which would otherwise not qualify for the relief, into a management holding company which held 20% of the underlying company and in which each of the individual holdings was now 20%.

The provisions removed from the relief many wholly commercial arrangements and they have now been changed (backdated to last year) to moderate their effect.

The position now is that where the new definitions apply part of the joint venture company trading activity will again be treated as being carried on by the investing company and equally part of the activity of a trading partnership in which the investing company is a partner will be treated as its own.

Under the new version of the rules a person must hold a 5% interest in the JV company or partnership directly or indirectly.  So if he or she has 20% in a company which does nothing but own 40% in another trading company they will have an indirect 8% holding and so would qualify. Someone who had 10% in the same company would only have a 4% indirect holding in the trading company and would not qualify.

Oddly therefore whether or not a company is treated as trading will turn in some cases on the % shareholding you have rather than the activity of the company.

Author: Lindsay Pentelow