What is it?
Entrepreneurs’ relief (“ER”) is a valuable relief in the UK – if certain conditions are met, the rate of Capital Gains Tax on the sale of shares is just 10%, rather than 20%, subject to a maximum lifetime limit of disposal of shares up to £10m.
What are the conditions?
Previously, in order to qualify for ER, an individual must be an employee or an officer in the company, have held the shares for at least one year which represented at least 5% of the ordinary share capital, and which entitled them to 5% of the voting rights. The company’s main activities must be trading, or the disposal is of the holding company of a trading group.
What was introduced in the Budget?
There were two changes introduced in the UK budget:
1) The holding period increased from 12 months to 24 months for share disposals after 6 April 2019.
2) From 29 October 2018 (i.e. with immediate effect from the date of the Budget), the shares must also entitle the holder to 5% of the company’s distributable profits and 5% of the assets available to equity holders on a winding up.
What is the issue?
A company can have multiple classes of shares (often referred to as ‘alphabet shares’).
The potential issue here is that the company’s directors usually have discretion over which share classes receive a dividend. This could mean that no individual share class is beneficially entitled to at least 5% of the profits available for distribution as the directors could vote dividends on one particular share class and not another.
There is therefore a risk that in this case, no shares in the company will be eligible for ER on disposal.
New test
On 21 December 2018, HMRC announced that an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company is to be introduced. This can be used instead of the tests based on profits available for distribution and assets on a winding up.
This new test means that if a shareholder holds a separate class of shares, they can meet this second test, where they would obtain at least 5% of the proceeds on a sale of the company (and this entitlement exists throughout the qualifying ER period).
All in all, the changes are certainly a tightening of the rules, but HMRC have listened to the specific concerns, particularly in connection with companies who have alphabet shares.
ER continues to be a valuable relief – please do get in touch if you have any questions or would like to understand if your shareholding qualifies for this reduced rate of Capital Gains Tax.
Please do feel free to get in touch if you have any specific questions in connection with the above.
Farley Kaye FCA
Managing Partner
For more information please contact Farley:
farley.kaye@fkgb.co.uk
052 627 7472
