Company Shareholders - Entrepreneurs' Relief Warning

 

Company Shareholders

Entrepreneurs' Relief Warning


Prior to the Budget on 29 October 2018, to qualify for Entrepreneurs’ Relief (which gives a 10% rate of Capital Gains Tax) the key conditions that the individual had to meet were:
 

  • Director or employee of the company or another company in the same group.
  • Holds at least 5% of the Ordinary Share Capital and Voting Rights.
  • Meets these conditions throughout the one-year period prior to either the date of disposal of the shares or the date the company ceased trading.

The changes to the legislation that were announced by Chancellor Phillip Hammond now add the following requirements to the existing conditions meaning that the individual must also:

  • have a beneficial entitlement to at least 5% of any dividends; and
  • have a beneficial entitlement to at least 5% of assets available on a winding up; and
  • have held the shares for a minimum of two years prior to a disposal on or after 6 April 2019 (though in many cases, the two-year period is effectively in place now).

These changes to the rules on Entrepreneurs Relief are designed to counter perceived aggressive tax planning arrangements and in their ‘summary of impacts’ HMRC said it would affect less than 1,000 individuals.

However, as more information has come to light in the last couple of weeks, the legislation has been found to have the potential to be much wider ranging and it appears it could restrict the availability of Entrepreneurs Relief in many seemingly normal day to day/innocent scenarios.

Unfortunately, HMRC has issued very little guidance about the new rules.  Therefore, in the short term, the position is somewhat uncertain, making it difficult for us to understand whether the new rules will catch common situations. 

If you are planning a disposal of your shares anytime in the next two years, but particularly if any transactions are imminent, we would advise you to contact us without delay to discuss the implications prior to completion.

You should exercise caution and seek specific advice if you are undertaking any share transactions, particularly if you have any of the following or are considering any of these:

  • Alphabet shares i.e. multiple classes A, B, C etc.
  • Growth Shares.
  • Clauses in the company articles of association giving directors discretion on which individual/class of shares dividends may be declared upon. 
  • Shareholders agreements which give priority allocations to certain individuals/shares.
  • Pre-emption rights.
  • Good and bad leaver provisions.

We are monitoring and waiting for HMRC to provide further details and guidance.  When that is available, we will provide an update on the position.

In the meantime, if you would like us to review your position and consider the availability of Entrepreneurs Relief based on current understanding of the new legislation, please contact George Hardey george.hardey@waltonscw.co.uk or Paul Buckley paul.buckley@waltonscw.co.uk for an initial discussion.