The Chancellor announced important changes to Entrepreneurs’ Relief in his 29 October 2018 Budget Statement.
As discussed in a previous post, the changes as drafted had wide-ranging, and it is assumed untended, consequences. In particular, the new legislation as drafted could have denied Entrepreneurs’ Relief to any shares in companies where there were alphabet shares (i.e. more than one class of share) even though they would otherwise have satisfied the conditions. This was on the basis that the new definition of ‘personal company’ required the shareholder to be beneficially entitled to at least 5% of the profits available for distribution to equity holders.
If a company has more than one class of share, the argument was that while someone might have more than 5% of the ordinary share capital, and voting rights, as the voting of dividends was at the discretion of directors, there was no entitlement to profits and therefore this test would fail unless there were provisions in the articles that, for example, all share classes ranked pari passu.
A pre-Christmas revision to the draft legislation means that holders of such shares can relax a little.
The most recent draft legislation includes the following definition of personal company:
- an individual must hold at least 5% of the ordinary share capital of the company;
- by virtue of that holding, at least 5% of the voting rights in the company are exercisable by the individual; and
- either or both of the following conditions are met –
- by virtue of that holding, the individual is beneficially entitled to at least 5% of the profits available for distribution to equity holders and, on a winding up, would be beneficially entitled to at least 5% of the assets so available, or
- in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.
It is this last leg of the test, that in the event of a disposal of the whole of the ordinary share capital, the individual would be beneficially entitled to at least 5% of the proceeds, that comes to the rescue. This would ensure that whatever the articles state, holders of different classes of share would potentially benefit from Entrepreneurs’ Relief, subject of course to satisfying other qualifying conditions.
While the blanket impact on holders of alphabet shares is mitigated, there will still be some potential impact on other arrangements in particular, the holders of growth shares. The holders of such shares might satisfy the % ordinary share capital requirement, and the voting rights, but nonetheless, as the proceeds they 5receive on a disposal would be in relation to a pre-defined hurdle, might not be 5% of the total consideration received. Such shareholders might not therefore benefit from Entrepreneurs’ Relief on a disposal.
Other changes to Entrepreneurs’ Relief still stand and, from 6 April 2019, there will be a 2 year rather than 12 month holding requirement. Given the extended period required to qualify, it’s important that those anticipating an exit from their business, take steps to review their Entrepreneurs’ Relief now so that remedial steps, if required, can be taken in time.
For more information on any of the topics raised, please feel free to contact our help team of tax advisers who are here to help. You can also read more articles by Ryan below.