New rules for entrepreneurs’ relief
Entrepreneurs’ relief is available to individuals (and, in certain cases, trustees) who realise qualifying gains. It operates so as to apply a rate of Capital Gains Tax of 10% to qualifying gains up to a lifetime limit (currently set at £10 million).
New rules about qualifying for the relief came into force late last year. In order to qualify for the relief the individual must, among other conditions, hold shares that entitle them to 5% of a company’s:-
- issued ordinary share capital;
- voting rights;
- distribution rights; and
- rights to capital on winding up.
The last two requirements were brought in with immediate effect by the Autumn 2018 Budget. The introduction of these two requirements has meant a significant tightening of the conditions of the relief.
It is important to pay due regard to the word “entitle” in the legislation for it requires a high threshold for the relief to be available. Essentially, shares must entitle the shareholder to these four rights; just because a shareholder is able to receive a dividend equal to 5 per cent of the profits, this does not mean that he is entitled to such a dividend.
This may create problems for those who have shares in a company that has different share classes. A company may want to have discretion as to dividend payments and this might be reflected in its Articles of Association. However, because of this discretion, it means that the individual may not necessarily be entitled to a dividend and, thus, will not qualify for the relief. In other words, a company’s ability to retain its flexibility for the payment of dividends may come at a cost to individuals who want to utilise the relief.
Changes to share rights may be desirable in light of the new conditions for entrepreneurs’ relief. Care will be needed when effecting these changes. This is because giving shares additional rights might increase their value and could have other tax implications.
The qualifying period is also undergoing change; it will be increased from 12 months to 24 months for disposals on or after 6 April 2019.
These changes highlight the need to review the position well in advance of any potential disposal in order to see whether the relief might be available.
This note is general only and does not take into account the specific circumstances of any individual. Please take specific specialist advice on your position on any disposal of shares.
Clare Richards specialises in corporate law within the Business Services department at Barker Gotelee Solicitors in Suffolk.