Entrepreneurs’ Relief – all is not lost?

21st December 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.

Finance Bill amendment

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:

  • They had to be an employee or office holder in the company
  • They had to hold at least 5 per cent of the ordinary share capital
  • They had to hold at least 5 per cent of the voting rights associated with that share capital

Budget restrictions

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):

  • They must be beneficially entitled to at least 5 per cent of the company’ distributable profits (i.e. any dividends declared); and
  • They have a right to at least 5 per cent of the net assets of the company available to equity holders on a winding up

New alternative test

Last minute changes have added an alternative test (p27-29) to these tests.

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.

This should help to solve the problem for many alphabet shareholders.


Whilst this is good news, shareholders wanting to claim ER should be aware that if there is a change of government, the relief may not continue to exist in its present form – if at all.


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