27 November 2018

The Budget 2018 and Entrepreneurs’ Relief: Making it Personal!

As a Partner and Chartered Tax Adviser at Wilkin Chapman solicitors, Nasim Sharf has extensive experience of working with businesses, their owners and their accountants. In his latest blog, he looks at changes to Entrepreneurs Relief, (ER), resulting from the Autumn budget and advises those affected by the new rules ‘not to panic’...

“ER has been with us since 2008. In the right circumstances where the relevant trading company is a “personal company” of the individual, he/she can sell his/her shares and pay capital gains at only 10%. Without ER, the rate would likely be 20%.

The rules for ER were tightened in the 2018 Budget with effect from October 29, 2018, with the change revolving around the definition of a “personal company”.

To explain: before this date a “personal company” required the individual to have

(a) At least 5% of the ordinary share capital and

(b) At least 5% of the voting rights in which are exercisable by the individual by virtue of that holding.

Experienced advisers had a clear idea of what “ordinary share capital” and “voting rights” meant and advice could be given with some certainty. That certainty led to share capital being structured so that an effective 3% shareholding would qualify for ER - achieved by creating a special class of share that (say) comprised 5% of the ordinary share capital but would be entitled to (say) only 3% of the capital value and/or dividend rights.

However, HMRC concluded that this was abusive and sought to tackle the issue in the most recent Budget, with changes made so that ER is only available where the “economic rights” (i.e. the right to dividends and capital) are at least 5%.

Unfortunately, the draft legislation is problematical for the following reasons:

  • The rules operate widely and impact arrangements that have not generally been regarded as abusive e.g. freezing value into preference shares as part of succession planning or structuring shareholdings to incentivise new shareholders in valuable companies (including “growth” or “hurdle” shares);

  • The rules relate to sales of shares on or after October 29, 2018. Arrangements put into place in good faith before then can still be caught by the new rules;

  • It is hard to understand exactly how the new rules will apply. They require the shareholder to be “beneficially entitled” to 5% of the dividends and capital. What does that mean given that no-one has a right to a dividend until one is declared? The draft legislation answers that question by importing rules wholesale from a totally unconnected area of tax law (namely, some anti-abuse tax rules relating to company group relief). Unsurprisingly, the fit is less than perfect and in certain situations, as things currently stand, it will not be possible to advise with certainty on whether ER is available.

Our advice is not to panic about the new rules. The uncertainty is so marked that there is a chance that the rules will be amended before they become part of the Finance Act. Also, it is likely that HMRC guidance will be issued.

Fortunately, the new rules do not impact shares acquired via the enterprise management incentives scheme (EMI).”

If you have any questions about this article or any other areas of tax or corporate legal matters, you can email Nasim on Nasim.Sharf@wilkinchapman.co.uk or you can call him on 01482 398393.

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