Posted by Paul Morris on December 21, 2018
The government has made changes to the Finance Bill following concerns that it could have denied Entrepreneurs’ Relief to shareholders where their company has different classes (alphabet) shares.
Back in November we highlighted a problem for such companies in that the October 2018 Budget restricted the right of their shareholders to Entrepreneurs’ Relief (ER) unless new strict conditions are met.
See our Have you lost your Entrepreneurs’ Relief? article.
But a last minute amendment during the passage of the Finance Bill through Parliament will allay fears that ER will not be available.
ER is valuable because it halves the rate of Capital Gains Tax (CGT) from 20 per cent to 10 per cent on disposals of shares in a company on up to £10m of lifetime gains.
Before the Autumn Budget, for ER to apply an individual had to meet three key conditions for a 12-month period prior to the date of disposal of shares:
That has now changed with effect for disposals of shares on or after 29 October 2018.
For disposals of shares on or after 29 October 2018, the individual must now meet two extra tests (in addition to the three mentioned above):
This alternative test is based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company, which can be used instead of the above tests.
For this test to be used it appears that there does not have to be an actual disposal, as the test is whether a shareholder would on a disposal be entitled. So this would cover liquidations.
This should help to solve the problem for many alphabet shareholders.
Leaving to one side for a moment the 50 day period when the alternative test does not apply, shareholders wanting to claim ER in future should also be aware that if there is a change of government, the relief may not continue to exist in its present form – if at all.
If you would like to discuss how these changes affect your plans to dispose of your shares, please contact a member of our Business Tax team.