Cassandra Graham, Tax Manager at Bates Weston, considers the new conditions and restrictions on Entrepreneurs' Relief post Budget.
The Budget 2018 brought in unforeseen changes to Entrepreneurs’ Relief which turned a relatively straightforward piece of legislation into one that raises more questions than it answers, particularly on its application and the intention behind the changes. The changes bring in more conditions and restrictions than before which begs the question of whether this is the start of what’s yet to come...
Not only do qualifying shares or business interests have to be held by an individual for 2 years rather than the previous 12 months for disposals after 6 April 2019 but there are now additional requirements for individuals disposing of shares which are effective immediately.
Previously individuals disposing of shares in trading companies had to own 5% of the ordinary shares which entitled them to 5% of the voting rights. Now along with these, two additional tests have to be met. The shares have to have the ‘beneficial entitlement’ to 5% of the company’s distributable profits and 5% of the net assets of the company on a winding up.
Given that these changes are effective immediately shareholders need to review their current structure well in advance of any disposal.
It also triggers wider questions of:-
- What is the definition of ‘beneficial entitlement’? Especially in the context of distributable profits?
- In what way will this be applied to ‘alphabet’ shares or ‘growth’ shares?
- What share rights can still be fixed?
- Is it time to cash in shares partially or fully now? How can this be done?
One thing is for sure, complacency is no longer an option especially when these changes were tucked into the ‘tax avoidance and unfair outcomes’ section of the budget which means the relief may be set for further change. "
Speak to our tax team today to discuss what these changes mean for your share structure.