Entrepreneurs may not be so relieved

Under the new rules for entrepreneurs' relief, to qualify for the relief you must hold shares that entitle you to 5 per cent of a company’s:

• Issued ordinary share capital
• Voting rights
• Distribution rights
• Rights to capital on a winding up

The last two conditions were added in the Autumn Budget with immediate effect and they represent a significant tightening of the conditions for the relief. 

The key word in the draft legislation is that the shares must entitle you to these four rights. For example, being able to receive a dividend equal to 5 per cent of the profits is not the same as being entitled to such a dividend. This requirement causes a real problem for those individuals who have shares in a company that has different share classes. In the typical alphabet share approach used to provide flexibility for the payment of dividends between different shareholders, the articles of association will normally give directors discretion on how to allocate dividends. This discretion means the shareholder is not entitled to a dividend and so will not qualify for entrepreneurs’ relief. 

If entrepreneurs’ relief has been lost as a result of these changes, care will be needed to correct the position as giving shares additional rights will increase their value and can cause further tax charges under the employment related securities rules. 

If changes are made, shareholders will have to wait a further two years before qualifying for entrepreneurs’ relief as the qualifying period is extended to two years from April 2019. Changes made now do not have enough time to take effect before then. 

In light of these changes we recommend undertaking a review of your share rights to ensure you continue to qualify for entrepreneurs’ relief.

If you need any further advice, please contact your usual Mills & Reeve contact, or email me on [email protected]