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November 28, 2018
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Budget 2018: Entrepreneurs' Relief & Alphabet Shares

In the 2018 Budget, the Chancellor announced changes to the conditions for Entrepreneurs' Relief ("ER") which will restrict its availability to certain shareholders.

Previous Rules

Prior to the budget, ER was available on the sale of shares in a trading company provided that for a period of 12 months up to the date of disposal:

  1. The seller was an employee/office holder of the company; and
  2. The company was their "personal company".

Personal company was defined as a company in which you held at least 5% of the issued ordinary share capital and 5% of the voting rights.

Changes

1. Extension of Qualifying Period to 24 Months

The first change announced was that from 6 April 2019, the minimum period throughout which the conditions for relief must be met will be extended from 12 months to 24 months.

2. Additional Conditions for Share Rights

More significantly, the definition of a “personal company” has been expanded to include at least 5% of the distribution rights and capital rights on winding up.  This will be in addition to the 5% of ordinary share capital and voting rights mentioned above.

These new conditions apply with immediate effect from the date of the Budget (i.e. from 28 October 2018).

This means that unless a shareholder has an absolute right to at least 5% of the dividends and assets on a winding up, the conditions for ER will not be met.

This could affect shareholders in companies with multiple classes of shares (e.g. alphabet shares) where directors can declare dividends on each class independently. For example, they can choose to distribute dividends to only one class of shares.

Share classes which do not carry an entitlement to at least 5% of distributable profits will not meet the new conditions for ER.

Steps can be taken to restore relief such as by amending the share rights so that the shareholders are entitled to at least 5% of the distributable profits, with the ability to vary the amount of any further dividends. However, this may not be possible where there are more than 20 share classes.

Where the rights attached to the shares are updated to the above effect, the new shares will need to be held onto for at least 2 years in order for ER to become available.

Shareholders who acquired their shares under an EMI scheme do not need to meet the 5% tests above and therefore are unlikely to be affected by this change.

At this stage the rules are still in draft and could be subject to change. We expect HMRC to provide guidance on their interpretation of the new rules shortly and will publish an update once this is available.

If you have alphabet shares or if you are unsure about how the new ER rules will affect you, please contact a member of our team.

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