The initial relief on Budget Day in October that Entrepreneurs’ Relief (ER) would remain at its current rate of 10% on a maximum gain of £10m limit was quickly followed by concern about the potential unintended consequences of two additional conditions announced by the Chancellor.
Those conditions related to the definition of “personal company” and were intended to ensure an individual benefiting from ER on a sale of shares has a material stake in that company. The two new tests became effective immediately and required an individual to have a 5% interest in both the distributable profits and net assets of the company in order to qualify for the relief. Concerns were immediately expressed that companies with more than one share class (alphabet shares) may not satisfy the new conditions if an entitlement to distributable profits for particular share classes is not expressly stated in the Articles of Association and if the voting of dividends is at the discretion of directors.
The good news is that, following representations from a number of professional bodies, the Government has now tabled an amendment to the draft legislation to insert an alternative test based on the shareholder’s entitlement to receive at least 5% of the proceeds in the event of a disposal of the whole of the company’s ordinary share capital. This would allow holders of different share classes to claim ER in circumstances where they may not otherwise be able to demonstrate their entitlement to the profits and assets of the company.
Although this is welcome news for holders of alphabet shares, it is worth noting that holders of share incentives such as growth share plans may still not qualify under the new tests.
The other main announcement by the Chancellor on Budget Day was an extension to the qualifying holding period for ER from 12 months to 2 years effective for disposals on or after 6 April 2019. Although this change is relatively uncontroversial, any potential sellers planning to dispose of their shares who currently meet the 12 month qualifying period for ER should consider whether they will still qualify if the disposal takes place after 6 April 2019.
If you would like to discuss these changes in more detail please contact a member of the team using the contact form below.