By Mike Hayes, Partner at Kingston Smith

Following the publication of our recent series of articles on the topic of Entrepreneurs’ Relief, changes were announced in the budget, which have further altered the landscape for business owners. In this article we examine what the key changes were, and summarise how these may affect a future business sale.

Summary of key changes

Trading company in own right

In a previous article we explained that one of the qualifying criteria for a disposal of shares to qualify for Entrepreneurs’ Relief was that the company in which shares are disposed is either a trading company or a holding company of a trading group.

Historically, a business not necessarily trading in its own right, could qualify for Entrepreneurs’ Relief by virtue of an interest in a qualifying joint venture “JV”, partnership or LLP.

As a result of changes announced in the Budget, a company can now no longer be regarded as a trading company or a holding company of a trading group simply by accounting for an interest held in a JV, partnership or LLP. The company must instead be trading in its own right for a continuous period of 12 months prior to disposal.

These changes do not affect a claim for Entrepreneurs’ Relief where a company with an interest in an LLP, JV or partnership, qualifies for Entrepreneurs’ Relief by virtue of its own trading activities.

The changes have inevitably led to many existing structures, which would have previously fulfilled the qualifying criteria for Entrepreneurs’ Relief now no longer being eligible. Many of these structures would have been set-up in the first place with solely commercial motives; however these changes may now render it necessary to review current arrangements.

Some respite for those potentially affected is that, where a corporate member of an LLP ceases to be a corporate member, it must satisfy the trading requirement for the 12 months before it ceased to trade (or deemed to trade), however the 12 months trading criteria does not run to the date of disposal of the interest in the company.

Therefore, if a limited company ceased to be a member of an LLP in ,say February 2015 and the company is subsequently liquidated in May, the new legislation will not apply. The disposal for Entrepreneurs’ Relief purposes takes place in May, but the company had ceased to be deemed trading in February 2015.

Providing the company has been trading (or deemed trading) for a continuous period of 12 months prior to it ceasing to be a corporate member, Entrepreneurs’ Relief may still apply to the sale.

Associated disposals

As highlighted in another of our previous articles, it is possible for a claim for Entrepreneurs’ Relief to be made on a disposal of an asset owned by an individual, but which is used in the trade of their personal company, partnership or LLP of which they are a member. It is possible to claim Entrepreneurs’ Relief on the disposal of the personal asset if it is linked to the material disposal of an interest in the business and as part of the withdrawal from the business.

Previously there have been no specific requirements as to the size of the reduction of the individual’s interest in the business in order for a claim to be made on an associated disposal. Following the budget, for an associated disposal to qualify for Entrepreneurs’ Relief, there must now also be at least a 5% reduction in the size of the individual’s underlying interest in the business.


As stated, the changes noted above may affect existing structures, which would have previously qualified for Entrepreneurs’ Relief under the old rules, but now may not do so.

It could therefore be a good time to analyse your corporate structure in the light of these changes. How you go about this will vary from case to case and to advise on this is beyond the scope of this article. It is crucial that any decision to restructure your business is firstly discussed in depth with your tax advisor who will be able to guide you through the implications of the amendments to the rules and what next steps should be taken.

The changes announced in the budget are in addition to those in last year’s Autumn Statement, which sought to prevent claims for Entrepreneur’s Relief, whereby the goodwill of a business is sold to a related party. Worryingly this is an area where HMRC seem to be increasingly seeking to curtail; our advice is to be mindful of the changes taking place and take sound, timely advice to protect your position.