Changes to Entrepreneurs Relief

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18 March, 2019

In the lead up to the Budget Statement at the end of October 2018, the Chancellor announced that changes to Entrepreneurs Relief ('ER') would be introduced in the New Year. ER is a relief applied on the sale of certain business assets or shares where Capital Gains Tax is charged at a reduced rate of 10%

These new changes could subsequently have an impact on shareholders of private companies that have different share structures, such as alphabet shares. Alphabet shares are classes of shares that are usually categorised to allow a company to attach different rights to different classes of shares such as varying the rate of dividends for different classes or granting some classes of shares voting rights and others non-voting.

The Budget introduced two key changes that must be satisfied in order to qualify for ER. These are:

  • for any disposal which takes place after 06 April 2019, the shareholder must have held the business assets or shares for 2 years immediately before the sale (before the changes this was only 1 year); and
  • with immediate effect, the shareholder must be beneficially entitled to at least 5% of the distributable profits and 5% of the company's assets available for distribution on a winding up.

The impact of these new tests has caused quite a stir when looking at alphabet share structures within a company as it's questionable whether or not a discretionary right to a dividend would give shareholders a beneficial entitlement to any part of a company's distributable profits. This interpretation could mean that if a company's share capital is solely comprised of alphabet shares, the holders of those shares wouldn't necessary have beneficial entitlement to the necessary minimum of 5% of the company's profits available for distribution (as there may only be a discretionary right to receive a dividend on some classes of shares) and entrepreneurs relief would therefore not be available on a sale of their shares.

The intention behind the new tests are to prevent individuals from benefitting from ER on cunningly designed share structures which, while satisfying both requirements, doesn't give shareholder a true economic stake within the company. While most would consider this fair and reasonable, this has concerned professional bodies over how the proposed rules would actually apply in practice.

In response to these concerns, the Chancellor tabled a further amendment to the tests in December 2018 which introduces an alternative test requiring the individual to show that, in the event of a disposal of the whole of the ordinary share capital, they would be entitled to at least 5% of the proceeds. Therefore, removing the need to demonstrate that they are also entitled to 5% of a company's distributable profits.

Finally, as the period of time which shares or assets must be held, in order to entitle the owner to benefit from ER, is increasing to two years it is important to plan in advance of any sale so that you do not fall short of the qualifying criteria.

It is important to seek specialist tax advice when considering the tax implications of such changes and our Corporate team can work closely with you and your advisors to consider your company's structure and any future restructures.

For more information contact Jodi Oosthuizen in our Corporate department via email or phone on 0333 207 9636. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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