During the last Budget, the Government announced new conditions to Entrepreneurs’ relief which have seen a tightening of the rules in connection with the share rights to which an individual must be entitled in order to qualify for the relief. This change, along with others made to the relief, took immediate effect.
The change ensures that a shareholder must benefit from a genuine economic entitlement to at least 5% of a company in order to qualify for the relief.
For gains arising from shares, or assets used by the company, the company has to be an individuals’ “personal company” which requires them to be an employee or officer of that business or one within the same trading group for a period of two years ending on the date of disposal.
In order to obtain relief shareholders would, therefore, have to meet four conditions:
- hold 5% of the ordinary share capital
- control 5% of the voting rights
- have a right to at least 5% interest in the distributable profits
- have a right to at least 5% of the net assets on a winding-up of the company.
However, the last two points have proved difficult to codify into law, due to the fact that they rely on provisions relating to companies, intended to prevent the abuse of corporation tax group relief.
The point regarding distributable profits also creates issues as such entitlement, usually in the form of dividends, is not given until a dividend resolution is passed by all the eligible shareholders.
Following these issues, HMRC has tabled an amendment that will create an alternative test for a “personal company” based on the shareholder’s entitlement to proceeds in the event of a hypothetical sale of the whole company.
The original tests have been left in legislation to provide certainty to those with straightforward company structures, but the new alternative test, which requires an entitlement to at least 5% of the proceeds when a company is sold, will help those who are not able to meet the original test for commercial reasons and does not rely on the rules that govern companies.