ER Anti-Forestalling Rules

It was announced in the Budget on 11 March 2020 that the ER lifetime limit is reduced from £10m to £1m for sales on or after that date. The draft legislation published on Budget day unfortunately goes considerably further, as it also contains two measures described as “anti-forestalling” rules designed to capture ER planning implemented pre-Budget, but which in our view had the potential to affect many transactions entered into on or after 6 April 2019 that had nothing at all to do with ER planning.

To summarise briefly, subject to certain very limited (and somewhat vague) exemptions the anti-forestalling rules work as follows:

• If a person has entered into an unconditional contract to sell an asset prior to 11 March 2020, the normal rule which says that (even though the sale is completed later) the date of disposal is the date of the unconditional contract is disapplied for ER purposes, meaning the sale will be treated as taking place within the new £1m cap regime for ER purposes; and

• If a share for share exchange has taken place during tax year 2019/20 (prior to 11 March 2020) and the ownership/control of the company hasn’t materially changed or where the previous shareholders hold more of the share capital afterwards than they did before (e.g. where a Newco has been put on top of the existing company for ER planning reasons or, it seems, for other perfectly commercial reasons too), then if the shareholders make the usual ER election on or after 11 March 2020 to disapply rollover treatment on the exchange (i.e. to treat the exchange as if it had been a sale for cash), the disposal will now be treated for ER purposes as falling within the post-11 March £1m cap regime.

Since Budget day, the draft legislation has been expanded to include certain other share reorganisations taking place on or after 6 April 2019 but before 11 March 2020, again effectively retrospectively denying (for ER purposes) the ability to make the election to disapply rollover treatment and fall within the £10m lifetime ER cap.

The revised draft legislation also states that ER is to be snappily re-named business asset disposal relief.

We commented in our Tax Bite of 12 March that the anti-forestalling rules were particularly harsh and had the potential to impact many innocent transactions that had no ER planning motive. As a result, we have made representations to HMRC on the proposals, which HMRC have acknowledged and said that they will be considering alongside representations from other tax advisers and professional bodies.

If you would like to see a copy of our representations, please get in touch. We have expressed our surprise and disappointment at the (effective) retrospective nature of the provisions, but then focussed our submission mainly on examples of where the rules could apply to cases that had nothing to do with ER planning, as we think this is likely to be the most persuasive approach in terms of getting the government to reconsider and soften the draft legislation before it is final.

We will issue a further update once the outcome of the representations is known.


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