Autumn Budget 2018
Changes to entrepreneurs relief may affect shareholders in companies with more than one class of share, for example growth or preference shares
Where entrepreneurs relief (“ER”) applies, capital gains tax is payable by a shareholder at 10% rather than the usual 20%. Pre-Budget, ER was available where
- a holder disposes of shares in his personal company; and
- the shares were held for a year or more
A “personal company” was a company where the holder held 5% or more of the voting rights and nominal capital. Shares acquired on the exercise of EMI options also qualify for ER, irrespective of the size of shareholding.
If the Budget proposals are passed EMI will continue to apply, but with two particular changes:
- with immediate effect, to be a personal company, the holder, in addition to the previous requirements, has to hold shares with rights to participate in at least 5% of the distributable profits, and 5% of the assets on a winding-up; and
- for disposals on or after 6 April 2019 the minimum holding period is now two years rather than one year
For EMI optionholders, the main consequence will be that ER will apply only where the underlying shares are disposed of at least two years from the date of grant of the option. Other shareholders will need to examine the Company’s articles carefully to ensure that they have the requisite entitlements, especially where there is more than one class of share.
For example, many private companies have two classes of share, which rank equally except that the board has the discretion to pay differing dividends on each class. On a strict reading of the new rules both classes of share might fail the ER test – neither has an entitlement to at least 5% of distributable profits, because dividends could be declared on the other class of share only.
The position is complicated further because the draughtsman has imported terms from the corporation tax regime into the capital gains tax legislation, where it does not fit comfortably. This also means that there are some possibly unintended consequences, for example bringing certain types of preference shares into reckoning in calculating the 5% threshold.
What can you do?
If you are affected by these changes, and in particular if you are a shareholder in a company with different share classes, you should make it a priority to consider whether you are still eligible for ER, and if not, whether anything can be done to rectify the position.
Please contact Robert Postlethwaite or David Reuben if you would like to discuss further.