The Chancellor certainly did not hold back at this Autumn budget. There was a whole raft of tax changes introduced, some of the most significant were around Capital Gains Tax and the implications for Directors and Shareholders.
If you are a Director Shareholder and have accumulated significant reserves in your company, or adversely are experiencing difficulties meeting your liabilities due to HMRC, you may want to consider your options now on how best to resolve these scenarios, as come April 2019 the landscape will be less favorable.
Now could just be the right time to ‘Pull the Pin’?
For those with accumulated reserves, you may currently meet the requirement to exit and achieve Entrepreneurs Relief, the sought after 10% tax rate. However from April 2019, you may find you either do not qualify, or you may need to wait another year, or potentially two, before you can release built up reserves.
The main changes are detailed below:
Minimum qualifying period extension
For disposals on or after 6 April 2019, the minimum period throughout which the entrepreneurs’ relief conditions must have been satisfied will increased from one to two years. The effect is as follows:
- for disposals of a business or an interest in a business, that business must have been carried on for at least two years;
- for disposals of assets used when business ceased, the business must have been carried on for at least two years (unless the cessation was before 29 October 2018, in which case the old one year rule applies);
- for disposals of shares, the qualifying conditions in relation to the company must have been met for at least two years (the policy paper states three years, it is assumed in error) – and again, if the claimant’s personal company ceased to be a trading company before 29 October 2018, the old one year rule continues to apply to disposals of shares within three years of cessation;
- for associated disposals, the asset that is disposed of must have been used in the business for at least two years; and
- for trust disposals, the qualifying conditions in relation to trust assets must have been met for at least two years.
Where a business has been transferred to a company in exchange for shares, the pre-transfer period can be included in applying the two-year rule.
Shareholding ‘diluted’ below the five percent threshold
Following the announcement at Autumn Budget 2017 that individuals whose shareholding was reduced below five percent as a result of a new share issue on or after 6 April 2019 would be able to obtain relief for gains up to that time, draft legislation was published on 6 July 2018.
The Definition of a ‘personal company’
For disposals on or after 29 October 2018, the conditions that must be satisfied to obtain entrepreneurs’ relief on disposals of shares (other than relevant EMI shares) have been tightened by the addition of two new tests that the company must meet to qualify as the individual’s ‘personal company’.
The new conditions require the individual to be beneficially entitled to at least five percent of the company’s distributable profits and to at least five percent of its assets available to equity holders in a winding-up (in addition to the existing share capital and voting rights conditions).
The new conditions will also apply to associated disposals so that they must be met in relation to a material disposal of shares before an associated disposal of an asset can qualify for relief. In addition, if goodwill is transferred to a close company and immediately after the disposal the transferor satisfies either condition, entrepreneurs’ relief will be denied.
HMRC to become preferential on Insolvent Liquidations
If you are unfortunate enough to be experiencing adverse trading conditions and cashflow is a problem, you may well have accrued unpaid liabilities owing to HMRC.
In the event you were unable to reverse the fortunes of the business, at present you have the option of liquidating the company or potentially coming to an agreement whereby creditors, including HMRC would receive a haircut on debts owed.
As announced in the budget, HMRC is set to achieve preferential creditor status and in such scenarios, you may become personally liable for any tax collected, and held on trust for HMRC such as VAT, PAYE and CIS.
If the company is unable to settle these liabilities through the liquidation, you could become personally liable for the payment of these debts and your personal assets may be at risk.
If you would like to discuss your position with one of our qualified Chartered Tax advisers or Chartered Accountants, please do not hesitate to contact us to arrange a FREE initial consultation in Canary Wharf, Essex or Manchester.