In our previous blog, “Important changes to entrepreneurs’ relief announced in autumn budget”, we explained how the proposed changes set out in the Autumn Budget 2018 appear to have added additional conditions that must be met in order for an individual shareholder to qualify for entrepreneur’s relief to reduce their Capital Gains Tax liability to 10%.
The proposed changes have resulted in significant lobbying around the consequences of implementing those changes. In response to this the government has amended the law, as from the 12th February 2019, resulting in entrepreneur’s relief being more readily available to business owners.
But for this change, the impact of the initial proposals meant that those who held “alphabet shares”, which can give discretion to the directors as to which class of shareholders are entitled to receive dividends, could have resulted in shareholders being unable to demonstrate that they had an entitlement to 5% of the profits and assets on a winding up, thereby putting them outside the criteria to claim entrepreneur’s relief. It is believed that this was not the intention of the government.
How do shareholders know if they are entitled to entrepreneurs’ relief?
The new conditions will remain however, the February amendment introduces an additional and alternative test, which can be used to satisfy the 5% economic rights test referred to above. The new test provides that in order to qualify for relief, an individual must be beneficially entitled to at least 5% of the proceeds available to the ordinary shareholders, as a class, on a sale of the whole or ordinary share capital of the company. This criteria must be satisfied throughout the two-year period prior to, and including, the date of the sale. This is applicable in respect of all disposals taking place on or after 21st December 2018.
Essentially, the new test provides that a business owner must demonstrate that they are entitled to 5% of the assets or 5% of the income, and that they are entitled to 5% of the proceeds on the sale of the ordinary share capital.
This new test alleviates a number of concerns and the changes should enable many alphabet shareholders to continue to qualify for relief. Regrettably some uncertainty remains, not least as to what constitutes ordinary share capital.
Advice on which shareholders qualify for relief:
There can be no doubt that it is now more difficult for individual shareholders to qualify for relief than it was prior to 29th October 2018. We would therefore encourage businesses to take expert advice as early as possible if they are considering a disposal of the business so as to ensure the appropriate structures and strategies are in place.