Entrepreneurs’ Relief changes – getting personal
Significant changes to Entrepreneurs’ Relief (“ER”) were announced in the 2018 budget. Some of the reforms, such as those designed to protect shareholders whose holdings are diluted below the 5% threshold tests, will be welcomed. Conversely, the extension of the minimum qualifying period from 12 to 24 months and, in particular, changes to the definition of a ‘personal company’ may have far-reaching consequences for entrepreneurs and other shareholders.
Prior to the budget, a personal company was that in which an individual held at least 5% of the ordinary share capital and voting rights. In order to qualify for ER on disposals after 29 October 2019 however, an individual must also:
- Be beneficially entitled to 5% of the distributable profits available to equity holders; and
- Be beneficially entitled to 5% of the company assets available for distribution to equity holders on a winding up.
In addition to ordinary shares, the term ‘equity holders’ may encompass some types of preference shares and certain loans.
The draft legislation has created much uncertainty over how these changes may be interpreted and applied in practice. It is hoped that HMRC will address the numerous concerns presented prior to publishing the final version however it is clear that the new rules could have a significant impact where different types of shares are an issue, especially where they have varying rights to dividends.