TT285: Entrepreneurs Relief – Budget Changes to the Availability of the Relief
In his Budget on 29th October 2018 the Chancellor of the Exchequer announced changes to the legislation on Entrepreneurs Relief (“ER”) to counter perceived to be abuses.
We were told that the changes were expected to affect around 1,000 tax payers each year but the draft legislation was drafted in such a way that many holders of shares in trading companies that were legitimately expecting to qualify for ER will have not qualified. Those potentially affected included those with “alphabet shares” “limited right shares” and “growth shares”, all of which would have been created for legitimate commercial reasons.
Fortunately, having listened to lobbying from the accountancy profession on 20 December 2018 the government tabled an amendment to the draft bill that makes the changes targeted at the more limited number of shareholders that in their view should not qualify for ER – those that do not have proper economic ownership of 5% or more of the value of the company.
There are two ways in which the qualifications for ER have changed: –
With effect from 6th April 2019 the qualifying period is extended from one year to two years.
Throughout the qualifying period relevant at the date of disposal the individual must have been an employee or officer of the relevant company and on each day in period the company must have been their personal company.
Definition of “Personal Company”
Although the legislation is not in force the updated definition of a personal company is in effect from 29th October 2018.
The requirements of a personal company are now as follows: –
A company is a “personal company” in relation to an individual if the individual
(1) holds at least 5% of the ordinary share capital of the company, and,
(2) by virtue of that holding at least 5% of the voting rights are exercisable by the individual; and,
(3) either or both of conditions (a) and (b) are met: –
(a) by virtue of that holding the individual is beneficially entitled to at least 5%
of the profits available for distribution to the equity holders of the company, and on a winding up of the company, to at least 5% of the assets so available; or,
(b) 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.
Where there is more than one class of share in issue in a company condition (a) even in the most straight forward of “alphabet” share structures is likely to be problematic as the draft legislation imports some esoteric legislation relating to group relief to define the qualification conditions. This is why the alternative condition (b) was introduced late in the day.
The essence of the new requirement is that to qualify as a personal company the individual must be entitled to 5% of the share sale proceeds. This is tested as at the date of actual sale based on real sale proceeds or where appropriate by applying a notional split of proceeds based on the market value of the company. Entitlement to proceeds of sale will be determined in accordance with the articles of association and any shareholders agreements in force.
Where shares have been issued pursuant to EMI options there is no requirement for the company to be the individual’s personal company, so these shares are unaffected by the changes to the personal company definitions.
Check your entitlement to Entrepreneurs Relief
There will be a number of shareholders that will not qualify for ER under the new rules whereas they did under the old rules. Primarily those affected will have shares that on sale do not give entitlement to 5% or more of the share sale proceed.
If you have any doubt over how you will be affected by the new rules please get in contact with your usual Barnes Roffe LLP partner.
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