Entrepreneurs Relief Changes for Shareholders

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Entrepreneurs Relief Changes for Shareholders – Background

Important changes were made to Entrepreneurs Relief in respect of disposals that took place either:

  • From 29 October 2018 onwards – a change to the 5% test and the definition of personal company; and
  • From 6 April onwards – a change in the period for which the conditions must take place
  • From 6 April onwards – a change to so-called diluted shareholdings

Entrepreneurs Relief Changes – the 5% Test & Personal Companies

In order to obtain Entrepreneurs Relief on shares then the company must be the vendor’s personal company.

Historically, the test required that 5% of the share capital and the voting rights must have been held by the person claiming the relief throughout the relevant period.

However, the test has been tightened up such that the claimant must also hold at least:

  • A 5% interest in the distributable profits of the company; and
  • One of the following:
    • A 5% interest in the assets available for distribution on a winding up; or
    • Entitlement to a minimum of 5% of the sales proceeds on the disposal of the ordinary share capital of the company.

For those with options under an EMI scheme, there is no change.

Entrepreneurs Relief Changes — change from 12 months to 24 months test period

Previously, the minimum period for which the relevant conditions needed to be satisfied was 12 months.

However, this has been extended to 24 months.

Where the business ceased or ceased to be a trading company (or holding company of a trading group) before 29 October 2018, the one year period will continue to apply.

Unlike the changes to the 5% test, there revisions do apply to EMI share options. The two year test is measured from the date of the grant of the options.

Entrepreneurs Relief Changes – Diluted Shareholdings

There have also been changes to the better, with legislation brought in to protect those whose shareholdings may become ‘diluted’ below the required 5%. For instance, because investment has been raised.

Where there is a new share issue from 6 April onwards then the new ‘relief’ allows (by election) for a shareholder to treat their shareholdings as being disposed of and immediately reacquired at market value. They can claim Entrepreneurs’ Relief on this ‘gain’.

In order to claim relief the shareholder must have been able to claim relief on the shares prior to the new issue.

Secondly, the issue of shares must have been for commercial purposes.

If you, or your clients, are considering disposing of any business assets then we would recommend obtaining tax advice in advance of such a transaction as relief might be secured with some pre-sale planning.

If you have any queries regarding our article on ‘what is Entrepreneurs Relief?’ or Entrepreneurs Relief in general then please do get in touch.

For our full and detailed sign post document on Entrepreneurs Relief then please visit here.

 

 

 

Entrepreneurs Relief Changes was last updated on 16 November 2019

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