Clive Owen LLP recently wrote an article Entrepreneurs' relief are you going to lose out? The draft Finance Bill led to concerns that shareholders were going to be denied making a claim for entrepreneurs' relief where their company has different classes of shares usually known as alphabet shares.
However, a late revision following lobbying from the accountancy bodies has led to an amendment to the Bill by the Government by including an alternative test.
To claim entrepreneurs' relief (prior to the Budget), an individual was required to meet three key conditions for a 12 month period up to the point of sale of the shares, namely:
- They had to be an officer or employee of the company
- The company in which the shares are held must be a trading company (or a holding company of a trading group)
- They had to hold at least 5% of the ordinary share capital
- They had to hold at least 5% of the voting rights
The Finance Bill following the budget added two further tests:
- They must be beneficially entitled to at least 5% of the companys distributable profits (i.e. dividends)
- They must have a beneficial right to at least 5% of the net assets of the company on a winding up
It was the first of the two new tests that was causing considerable angst for companies with multiple classes of shares, as the decision to vote a dividend is at the discretion of the Board of Directors so it could have been interpreted that no shareholder was beneficially entitled to any of the company's distributable profits.
What's the additional change?
Thankfully, the Finance Bill has been updated and whilst it still contains the original new test as above, there is now an alternative test. The alternative test relates to a shareholders entitlement to proceeds in the event of a sale of the company.
The legislation extract is shown below:
Either or both of the following conditions are met
(i) by virtue of that holding, the individual is beneficially entitled to at least 5% of the profits available for distribution to equity holders and, on a winding up, would be beneficially entitled to at least 5% of assets so available, or
(ii) in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.
It is the or that is important here. As long as you can meet (ii) you do not need to worry about (i).
It is therefore apparent that as long as the alphabet shares all carry the same rights (the dividend rights can differ) that entrepreneurs' relief should be available to all of the shareholders assuming all other conditions are met.
It is worth reviewing the company's articles of association to ensure that this is the case.
The extension of the 12 month holding period to 24 months announced in the Budget remains in place and will come into force for sale of shares on or after 6 April 2019.
Give us a call, if you have any queries in relation to entrepreneurs relief as not taking advice could be a costly mistake.