BR Guide Second Edition

71 70 THE PRACTICAL ROUTE TO BR THE PRACTICAL ROUTE TO BR The business must be a ‘personal company’ where the investor holds at least 5% of the shares, and voting rights, entitlement to profits or assets on a winding up evidencing a material stake in the business. Since 13 February 2019 minority shareholders who see their investment dip below 5%, as a result of a commercial issue of fresh equity, have been able to elect to protect their ER by crystallising a notional gain. This will require the tax to be paid on the notional gain, albeit at the reduced ER rate of 10%, or tax on the gain may be deferred until the actual sale of the shares. But, in the event of deferral, the shareholder must continue to satisfy the other conditions for ER (notably employment) in order to claim relief. In April 2016, ER was extended to external investors in unlisted trading companies. This new Investors’ Relief is separate to ER and applies a rate of CGT of 10% to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals. Entrepreneurs’ Relief Aside from the core tax goal of mitigating IHT, depending on investors’ circumstances and the type of BR investment, Entrepreneurs relief (ER) can be accessed at the same time, although not all BR structures attract ER. October 2018 and April 2019 saw changes to ER qualification requirements. Entrepreneurs’ Relief is a CGT relief which applies a tax rate of 10% to gains accruing on the disposal of shares in a business by a director or employee of that business. Prior to 6 April 2019, the shareholder was required to be an employee or office holder of the company for at least a year prior to the disposal in order to qualify for ER. From 6 April 2019, this was extended to two years. 7.2 Anti-Avoidance DEBT AND ANTI-AVOIDANCE If a debt has been raised in order to purchase a BR service, there are anti-avoidance provisions that negate the value of such planning: the debt does not reduce the value of the estate. The liability attaches to the qualifying assets, and only any value in excess of the debt is outside of the charge to IHT. SALE OF THE COMPANY BR is not available if there is a binding arrangement to sell the business, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company. Basically, HMRC only wants to give relief on businesses that will continue after the shareholder’s death. However, the common arrangement that the deceased shareholder’s shares be purchased by the remaining shareholders is fine, provided this was a cross option arrangement which applied to all shareholders. FEES AND CHARGES BR is only given on amounts subscribed for qualifying investments, so any initial charges deducted or amounts held in cash will not be eligible for tax relief (although they will of course not be subject to IHT either). LIQUIDITY GENERATION If the liquidity for an exit was created by a share buyback instead of a matched bargain (matching inflows with outflows), then the investor may be subject to income tax rather than CGT. This will be dependent on how BR service managers structure and operate their service. The shares must be held for 3 years from 6 April 2016 before disposal. They must be ordinary shares and not listed on a recognised exchange. There are also restrictions on the ability of investors to be employees or directors of the company, which must be trading. Technical Points Although the qualification rules may seem simple, it’s still worth looking at some of the technical points that advisers need to know and that could exclude an investment from BR qualification or create other potential issues. Inflation Rates & Gearing Some BR services may have a positive correlation to inflation and see an increase in their returns when inflation rises. Services that use gearing, but with underlying assets that have a negative correlation to inflation, would see an increase in their cost of borrowing, without a concurrent increase in the return from their underlying investments. 7.3 RELIEF/WRAPPER Entrepreneurs Relief Investors Relief RATE OF RELIEF CGT is applied at 10% CGT is applied at 10% ELIGIBLE PARTIES Directors or employees of the company holding a minimum of 5% shares and material stake in the business External investors in the company, holding newly issued shares MIN. HOLDING PERIOD 2 years 3 years* WINDOW OF OPPORTUNITY The relief has to be claimed (i.e. it is not automatic). The deadline for claiming is 31st January in the year that is 2 years after the tax year in which the shares are sold. The shares must have been issued on/ after 17 March 2016. The relief has to be claimed (i.e. it is not automatic) and is reported to HMRC on the tax return for the year in which the disposal takes place. MAXIMUM LIMIT Lifetime cap of £10m Lifetime cap of £10m FURTHER CONSIDERATIONS Applies to investments in unlisted trading companies, many of which may also be eligible for BR Applies to investments in unlisted trading companies, many of which may also be eligible for BR ENTREPRENEURS’ RELIEF *Starting from the later of 6 April 2016 or the date of acquisition of the shares. SOURCE: BANK OF ENGLAND INFLATION REPORT AUGUST 2019 UK INFLATION RATE (% YEARLY CHANGE) 0% 2% 4% 6% 2005 2007 2009 2011 2013 2015 2017 2019