Any capital gain made on the disposal of shares or assets of a company or business which qualifies for entrepreneurs’ relief should attract a reduced rate of capital gains tax of 10%. While there is no limit on how many times you can claim, there is a lifetime limit to the relief of £10 million.

The Finance Act 2019 effected three changes to entrepreneurs’ relief. The changes would affect either disposals made on or after 29 October 2018 or 5 April 2019.


1.       The extension of the ‘qualifying period’

The period throughout which the qualifying conditions must apply has been increased from one to two years. This means that the business must have been carried on for at least two years from the period of cessation or for the period prior to a sale or transfer – the ‘qualifying period’.

The changes apply only to transactions made after 5 April 2019 (unless it relates to a business which ceased to trade before 29 October 2018).

This will affect the transactions such as the disposal of part of or the whole of a business by an individual or the sale/transfer of an asset which was used at the time that the business ceased to trade, among others.

However, in addition to the extended qualifying period, a relief has been introduced for unincorporated businesses which are transferred to a company in exchange for shares. Prior to this change, when the qualifying period was one year, you could not include any period of ownership when the company was unincorporated.

Now, where the shares are acquired at the point of incorporation, an individual can include the period of ownership of the business prior to its incorporation in satisfying the qualifying period.


2.       Definition of ‘personal company’

Prior to this change, which will affect disposals on or after 29 October 2018, the qualifying conditions for a ‘personal company’ were that the individual must be an employee or officer of the company and hold:

  • 5% of the ordinary share capital; AND
  • 5% of the voting rights.

 The Finance Act 2019 introduces an additional condition, noting that the individual must also be entitled to either:

  • 5% of the company’s distributable profits and 5% of assets available to shareholders; or,
  • in the event of the disposal of all the ordinary share capital, 5% of the proceeds of this disposal.


3.       Dilution of shareholding 

The final change was introduced so that owner-managers of businesses were not discouraged from seeking external investment to finance the growth of the business. This external investment would often dilute their own shareholding, often below the critical 5% threshold which would bring their gains outside the remit of entrepreneurs’ relief.

Where the individual’s shareholding falls below 5% as a result of a fundraising issue, the individual can choose to crystallise their gain at that point and cash in on their entitlement to entrepreneurs’ relief on the gain to this point. The individual would be treated as having disposed of their shareholding and then reacquiring at the date of issue. The relief is only available when there is an issue of shares for genuine commercial reasons.

There is also the option to defer the payment of the tax until the shares are actually sold. This allows individuals to delay the tax liability until they are in receipt of funds from an actual sale.

Please note that both elections are irrevocable and advice should always be sought in advance of making either election as triggering the gain may not always be beneficial. For example, in the event that the company fails, the tax charge will still need to be paid.

This change applies to disposals after 5 April 2019.


Further advice 

For more information on entrepreneurs’ relief or capital gains tax in general, please contact us on 0131 228 8111 or at Enquiries.

This note is intended as a brief summary of the changes to entrepreneurs’ relief enacted by the Finance Act 2019. No responsibility can be accepted for any action taken in reliance on this note and specialist advice should be taken in every case. Turcan Connell would be happy to provide such advice.