This month’s budget announcement didn’t herald the end of Entrepreneurs relief as some had speculated but did make a number of changes which will mean that share ownership structures involving different classes of share attracting different rights to income and distribution will need to be reviewed to make sure that the holders of those shares still qualify for the relief.
Entrepreneurs Relief has existed in its present form over ten years and allows those who qualify to dispose of their shareholding or their business, subject to certain qualifications and pay Capital Gains Tax at a discounted rate of 10%. Qualifying critera included holding shares for at least 12 months prior to any disposal and, holding at least 5% of the issued share capital.
October’s budget changes mean that with effect from the 2019/2020 tax year any disposal on or after 6 April 2019 will require a holder of shares to have held them for at least two years to benefit from the relief.
What was less publicised was the fact that with effect from mid-night on the day of the budget, to qualify for Entrepreneurs Relief a qualifying shareholder will need to ensure that not only does their shareholding represent 5% of the issued share capital, but also, that shareholding gives rise to 5% of the distributable profits and net assets of the Company on a winding up.
This change causes issues for many SME’s who not uncommonly, through different share classes, agree that profits and capital distributions may be shared in proportions different to the proportions in which share represent a percentage of ownership.
As a consequence, all companies should not only review their share structures in light of this change, but also ensure that any share option schemes that they have in place do not fall foul of the new changes.
It may well be that an exercise to re-designate rights of different share classes and amendments to articles of association needs to be undertaken to make necessary changes. These reviews should be undertaken sooner rather than later given the need to hold qualifying shares for at least 2 years rather than 1. The nature of these changes are such that shareholder approval will need to be obtained and that in itself can take time to co-ordinate and effect.
If you would like to talk to us about this article, the impacts of these changes to you or your business, or company law generally, please do not hesitate to contact Ashan Arif or Stuart Mullins.