In the Autumn Budget, the Chancellor announced changes to Entrepreneurs’ relief (“ER”) which had much wider application and significance than originally thought.
More recently, HMRC have announced further amendments to the changes, to provide clarity and transparency.
These recent changes relate specifically to the definition of a “personal company”, as it was originally uncertain whether any shares would qualify if there were alphabet shares in issue.
To clarify, a company is a “Personal Company” in relation to an individual if –
(a) The individual holds at least 5% of the ordinary share capital of the company;
(b) By virtue of that holding, at least 5% of the voting rights in the company are exercisable by the individual, and;
(c) Either or both Economic Conditions are met.
Under HMRC’s amended rules, shareholders are now required to meet one or both of the Economic Conditions, together with all remaining conditions to qualify for Entrepreneurs’ Relief.
Economic Condition 1 still reflects the original proposals in that a shareholder has to be beneficially entitled to at least 5% of the profits available for distribution to the company’s equity holders and the company’s assets available for distribution to its equity holders on a winding up.
The alternative Economic Condition 2 says that in the event of a disposal of the ordinary share capital of the company, the individual would be beneficially entitled to 5% of the disposal proceeds.
As only one of these two conditions needs to be met, it is likely that the second Economic condition will be easier to apply, especially where there are alphabet shares in issue.
HMRC have announced that they will issue further guidance in due course, but in the meantime please do not hesitate to contact a member of our dedicated Tax team should you require any further advice or clarification on the proposed changes to Entrepreneurs’ Relief – get in touch today.
