Date posted: 11th Nov 2018
Entrepreneurs relief is a valuable relief for those individuals selling shares. It can reduce the capital gains tax rate from 20% to 10% (on up to £10m of capital gains) as long as certain conditions are met.
In very basic and simple terms, to qualify for entrepreneurs relief (prior to the budget on 29 October 2018), the following conditions need to be met for a period of 12 months ending prior to disposal:
- The company which you hold the shares in, must be a trading company or a holding company of a trading group
- You must be an officer (director or company secretary) or employee
- You must hold at least 5% of the “ordinary share capital”
- You must hold at least 5% of the voting rights
Each of these conditions needs further investigation, as HMRC may have differing interpretations (to you or us) on what constitutes a trading company, particularly where that company also holds investment assets – share portfolios, investment properties etc. The definition of “ordinary share capital” has been debated at tax tribunals in recent times too, so please don’t make the mistake that the above is advice in relation to whether you qualify for entrepreneurs relief, as such advice would require a detailed analysis of your individual circumstances.
So what’s new?
In an attempt to curtail some perceived tax avoidance, the Chancellor introduced two further conditions with immediate effect on budget day (29 October 2018), namely:
- You must be “beneficially entitled” to 5% of the company’s distributable profits
- You must have a “beneficial right” to at least 5% of the net assets of the company on a winding-up
Who might this impact?
Companies with more than one class of share, need to consider the impact of the rule changes.
For example, many family companies issue “alphabet” shares (a common tax planning technique whereby A and B shares have the same shareholder rights apart from being able to be voted dividends by the directors independently) so their shareholders may lose out on entrepreneurs relief, following the new rule changes, as no class of share is “beneficially entitled” to any of the company’s distributable profits, this decision on the voting of dividends would be at the Board of Directors discretion.
Similarly, employees who have acquired shares through the HMRC approved EMI scheme (such shares aren’t necessarily subject to the 5% test), may no longer qualify if their shares are of a different class to the shares held by other shareholders.
Given that this amendment to the legislation was only intended to impact about 1,000 individuals, it seems that the draftsman who prepared the new legislative tests has mis-understood the government’s intention, as the proposed changes will impact upon many thousands of companies.
We have already made representation to the ICAEW and the CIOT, and they can hopefully lobby the government, and achieve an amendment to the legislation before the Finance Act becomes law. We await their response.
Our view is therefore that the legislation is likely to be altered before it is finalised, but such amendments cannot be guaranteed. It will be a few months before the issue becomes clear.
Is there anything else to be aware of?
In addition, for sales of shares after 6 April 2019, the 12 month holding period is extended to 24 months. So anyone in the process of selling their company needs to take advice, particularly if that sale would be delayed post 6 April 2019.
You will also need to bear in mind the issues with dilution, upon accepting further investment in the company.
Entrepreneurs relief is becoming more and more complicated, and you should not simply assume that you do qualify for the relief.
Please do take specialist tax advice, so contact us today.