In his 2018 Autumn Budget, Chancellor Phillip Hammond announced changes to the qualifying conditions for Entrepreneurs’ Relief. We are waiting for HMRC to provide further detail so that we can consider the best course of action, and in the meantime, we wanted to share what we know so far…
To qualify for Entrepreneurs’ Relief (ER) and the lower 10% rate of Capital Gains Tax (CGT), the legislation now requires that an individual:
has a beneficial entitlement to at least 5% of any dividends,
has a beneficial entitlement to at least 5% of assets available on a winding up, and
holds the shares 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).
The new conditions add to the previous requirements including maintaining a position as director/employee and holding at least 5% of the ordinary voting share capital of a trading company/group.
These changes to the ER legislation are designed to counter perceived aggressive tax planning arrangements. Unfortunately, HMRC has issued very little guidance with the new provisions, making it particularly difficult in the short term for us to understand whether the new rules will catch some innocent situations which were never adopted for tax planning reasons.
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
Clauses in the articles giving directors discretion on which individual/class of shares dividends may be declared upon
Shareholders agreements which gives priority allocations to certain individuals/shares
Pre emption rights
Good and bad leaver provisions.
We are working with our contacts to try gain further clarification and be able to provide relevant advice. In the meantime, the best recommendation we can give is to sit-tight.
If you would like us to look in detail at your situation and comment on the likelihood of ER applying, based on our interpretation of the current rules as drafted, please get in touch.