Entrepreneurs' Relief and Trusts

The recent Emergency Budget announced an increase in capital gains tax from 18% to 28%. This was tempered by the generous extension to Entrepreneurs' Relief, which now offers a 10% CGT rate for the first £5 million of gains on the sale of a business. But with such a large differential in rates, the cost of not qualifying for Entrepreneurs' Relief is now huge, resulting in extra tax of up to £900,000 (or £1.8 million for married couples).

A particular risk exists where shares are held in a family trust. Trusts often hold private company shares for sensible tax or estate planning reasons and although Entrepreneurs' Relief can apply to shares in a trust, various additional conditions need to be satisfied. Where those conditions are not met, it may be possible to restructure the trust to ensure the relief is available.

Entrepreneurs' Relief applies to UK trusts but it can also be relevant for offshore trusts where one or more beneficiaries lives in the UK. Since the conditions need to be satisfied for at least one year, and because a sale of the business could happen at short notice, we recommend that trustees take action as soon as possible. Not doing so might even amount to a breach of the trustees' fiduciary duty if Entrepreneurs' Relief is lost when it could have been preserved by taking appropriate steps.

For further advice on Entrepreneurs' Relief and how to ensure it applies to trusts, please contact Andrew Goldstone on +44 207 440 7205 or andrew.goldstone@mishcon.com.