Lead Forencsices

Posted by James Pearson on 03 Jan 2019

Changes to Entrepreneurs Relief

Changes to Entrepreneurs Relief potentially threatened the availability of capital gains tax relief for owners of companies with alphabet share classes.

Entrepreneurs Relief

Entrepreneurs Relief was introduced in 2008 and reduces the rate of capital gains tax to 10% on the disposal of qualifying business assets, including shares in certain trading companies. Broadly speaking, shares could qualify for Entrepreneurs Relief if the following conditions were met:

  • The person disposing of the shares owns at least 5% of the business and voting rights,
  • The person disposing of the shares is an officer or employee of the company, and
  • These conditions have been met for at least one year ending with the date of disposal.

 

Changes to Entrepreneurs Relief

On 2019 October the Chancellor announced changes to Entrepreneurs Relief as part of the 2018 Budget. These changes were motivated by a concern that Entrepreneurs Relief was being claimed by individuals who did not hold a true material stake in the company being disposed of. These changes came into effect immediately, meaning that from 29 October 2018 an additional condition must be met if Entrepreneurs Relief is to be available on a disposal of shares:

  • The person disposing of the shares is beneficially entitled to at least 5% of the company’s distributable profits and assets available for distribution on a winding up.

Additionally, the period during which conditions must be met has been extended to at least two years ending with the date of disposal.

Alphabet Shares

It is common for companies (especially companies owned by a small number of individuals) to have a number of different share classes. These different share classes are often named after letters of the alphabet, hence “alphabet” shares. One of the primary purposes of alphabet shares is to allow for flexibility as to how dividends are to be allocated between those share classes. This would make it hard for a person owning shares in a company with alphabet share classes to meet the new condition since they would not necessarily be beneficially entitled to any particular percentage of the company’s distributable profits.

Amendment to Definitions

The documentation released by HMRC covering the Budget changes did not mention any impact on alphabet share classes, and various professional bodies (such as the Chartered Institute of Taxation) approached HMRC to query this apparently unintended consequence.

Following discussion, HMRC have issued a statement to the Chartered Institute of Taxation along with amended draft legislation that protects Entrepreneurs Relief for owners of alphabet shares.

The new legislation adds a further new condition and provides that Entrepreneurs Relief is available if either of the two new conditions is met. As a result, Entrepreneurs Relief is now available if the following conditions have been met for at least two years ending with the date of disposal:

  • The person disposing of the shares owns at least 5% of the business and voting rights,
  • The person disposing of the shares is an officer or employee of the company,

And either:

  • The person disposing of the shares is beneficially entitled to at least 5% of the company’s distributable profits and assets available for distribution on a winding up, or
  • In the event of a disposal of the whole of the ordinary share capital of the company, the person disposing of the shares would be beneficially entitled to at least 5% of the proceeds.

It should be possible for an owner with alphabet shares to meet this last condition, providing that the shares they own equate to at least 5% of the market value of the company.

Need for Care

While it is positive that HMRC have provided this second condition, clarifying the position for owners of alphabet shares, the new conditions add a new layer of complexity to Entrepreneurs Relief and additional care must now be taken to ensure that relief is available.

If you would like any advice regarding the changes to entrepreneurs relief or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com

 

See also…

Tax Reliefs

Budget 2018 Summary

Tax Rates and Allowances