Anti-forestalling rule added to entrepreneurs’ relief reform

HMRC has updated its technical note on the changes to the lifetime limit for entrepreneurs’ relief, which has been cut to £1m, detailing an additional anti-forestalling rule

At Budget 2020 the Chancellor announced that the entrepreneurs’ relief lifetime limit would be reduced from £10m to £1m. This will apply to qualifying disposals made on or after 11 March 2020 and to certain disposals made before 11 March 2020.

The Finance Bill includes legislation to counter certain forestalling arrangements that seek to ‘lock-in’ to the pre-Budget day lifetime limit.

Those arrangements make use of unconditional contracts entered into before Budget day, the time of disposal rule at s28(1) Taxation of Chargeable Gains 1992 (TCGA 1992), and contractual completion of the disposal after Budget day.

The arrangements normally include the creation of a company or other vehicle that ‘stands on contract’ until such time as a further purchaser is found.

The rule being introduced maintains the date of disposal for the contracts but applies the new lifetime limits to these disposals unless two conditions are both met.

One is that the parties to the contract demonstrate that they did not enter into the contract with a purpose of obtaining a tax advantage by reason of the timing rule in s28 TCGA 1992 and, secondly, where the parties to the contract are connected, that the contract was entered into for wholly for commercial reasons, and a claim is made.

For these purposes the meaning of ‘connected person’ is that given by s286 Taxation Chargeable Gains 1992 (TCGA 1992)

HMRC says an arrangement would normally be expected to fall outside of the tests, and be subject to the new lifetime limits, where the unconditional contract has been entered into in anticipation of a change to the scope of entrepreneurs’ relief.

Where a person believes that the tests are met, and the disposal is subject to the pre-11 March 2020 lifetime limits, they must make a claim to this effect (an ‘additional claim’) as well as the normal claim for entrepreneurs’ relief. For most people this would mean including both claims in a self assessment tax return.

The additional claim is to include a statement or declaration that the contract was not entered into with a purpose of obtaining a capital gains tax advantage by reason of the application of s28 TCGA 1992 and, where the disposal is to a connected person, that the contract was entered into for wholly commercial purposes.

Where a tax return is made, this statement should be included in the ‘white space’ in the return or as an attachment.

Where the affected gains relate to disposals by trustees of a settlement the statement is to be made jointly with the qualifying beneficiary in the same way as with entrepreneurs’ relief claims under s169M(2)(a) Taxation Chargeable Gains 1992 (TCGA 1992)

Reduction in the lifetime limit for Entrepreneurs' Relief - technical note

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