In the 2018 Autumn Budget, the Chancellor announced some changes to the Entrepreneurs’ Relief rules, which would have affected companies with alphabet shares or different classes of shares.
However, following consultation with professional bodies, the Government have listened to their concerns and made an addendum to the rules, which although tightens the availability of the relief, does not make it so prohibitive.
Based on the most recent amendments, the Entrepreneurs’ Relief shareholding conditions (effective from 29 October 2018) are:-
- A holding of at least 5% of the ordinary share capital;
- A beneficial entitlement to 5% voting rights; and
- A beneficial entitlement to either:
(i) 5% assets on winding up and entitlement to 5% distributable profits, or
(ii) in the event of a disposal of the whole of the ordinary share capital of the company, beneficial entitlement to at least 5% of the proceeds.
The new third condition looks to tighten the rules so that eligible shareholders have entitlement to 5% of the “economic value” of the company. However, by introducing the proceeds test at 3(ii), the new conditions should now be less of a problem for share structures with alphabet shares or different classes of shares, provided those shareholders are entitled to at least 5% of the proceeds on sale of the company.
If you have ‘growth’ shares (where you only receive a proportion of the value over a threshold level) you may well not be entitled to 5% of the proceeds on a sale, and so under the new amended rules would not qualify for Entrepreneurs’ Relief.
As the legislation will also extend the qualifying period for Entrepreneurs’ Relief conditions from 12 months to 24 months, for disposals made on or after 6 April 2019, if any changes do need to be made to share rights, it will be two years before a disposal of affected shares could qualify for Entrepreneurs’ Relief. Remember your business must be trading and you an employee or office holder of the company.
If you would like any advice in this area, please call and speak to our expert team.