Following the Chancellor’s Autumn Budget, we shared news of the announced changes to the qualifying conditions for Entrepreneurs’ Relief (ER). Details were limited at the time, but enough to suggest that there could be a significant impact for the shareholders of any companies with multiple classes of shares or growth shares.

Whilst we waited for clarification, we advised caution to anyone considering a change of share structure and then, unexpectedly, amended legislation was issued on the Friday afternoon before Christmas…

The detail

The amendment contains changes to the definition of ‘personal company’ for ER purposes. The amendment will add an alternative test, based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company, which can be used instead of the tests based on profits available for distribution and assets on a winding up.

The original tests have been left in to provide certainty to those with straightforward company structures, but the new test will help those who are not able to meet the original test for commercial reasons.

Updated qualifying conditions

To qualify for ER and the lower 10% rate of Capital Gains Tax (CGT), the legislation now requires that in addition to the original criteria of holding at least 5% of the ordinary share capital and 5% of the voting rights an individual:

  • has a beneficial entitlement to at least 5% of any dividends declared and 5% of assets available on a winding up,


  • in the event of a disposal of the whole of the ordinary share capital of the company, has beneficial entitlement to at least 5% of the proceeds.

The shares also need to qualify for a minimum of two years prior to a sale for disposals on or after 6 April 2019 (in many cases, the two-year period is in place now).