What changes to Entrepreneurs Relief mean to you

21/Mar/2019

Entrepreneurs’ Relief (ER) reduces the rate of capital gains tax payable on certain qualifying business disposals to 10%, representing a deduction to the normal rate of 20%.

Over the past year there have been multiple changes to the ER rules that will impact shareholders potentially benefiting from the relief going forward. The culmination of these are two key changes as follows:

  • An extension of the qualifying holding period from one year to two years (introduced for disposals on or after 6 April 2019); and
  • Changes to the definition of a personal company for ER (introduced for disposals on or after 29 October 2018).

Qualifying holding period

The extension of the qualifying holding period from one year to two years will mean that to protect their position shareholders will need to consider their position at least two years in advance of any potential transaction.

Personal company

Under the new legislation, for the company to be a shareholder’s personal company then:

  • the shareholder must hold at least 5% of the ordinary share capital (in terms of nominal value) of the company;
  • by virtue of holding those shares, the shareholder must be able to exercise at least 5% of the voting rights and either:
    • be beneficially entitled to at least 5% of the distributions (profits or assets on a winding up) available to equity holders, or
    • in the event of a disposal of the whole of the ordinary share capital of the company, be entitled to at least 5% of the proceeds.

The intention of these changes is to ensure shareholders benefit from a genuine economic entitlement to 5% of a company and thus a true material stake to qualify for ER, which is expected to have implications for holders of certain share types.

For example, holders of ‘growth shares’ (where value is received only in the growth of a business over a set threshold) may no longer be entitled to ER if they are not entitled to 5% of the total proceeds on sale.

Are you operating an Enterprise Management Incentive Scheme?

The changes may however enhance the attractiveness of shares received through an Enterprise Management Incentive option scheme which, despite retaining the two-year holding requirement, are not subject to the restrictions relating to 5% of economic share rights.

Recommended reading: 
The benefits of an Enterprise Management Scheme (EMI)

Holders of ‘alphabet shares’ for the purpose of payment of different dividends to ordinary shareholders should remain unaffected provided they remain entitled to the 5% proceeds entitlement.

Discuss how Entrepreneurs’ Relief affects your business

Our team can provide a comprehensive review of shareholder entitlement to Entrepreneurs’ Relief in light of these changes - if you are concerned that any of these matters may affect you please get in touch.