The Chancellor announced during his Budget speech on 29 October that a change would be made to the qualifying conditions that need to be met in order to claim entrepreneurs’ relief (ER).
As a reminder, on 28 October 2018 the relief was available on a disposal of shares where the following conditions were met in the year prior to disposal:
- the individual held at least 5% of the ordinary share capital (i.e. nominal capital) in the company and at least 5% of the voting rights in the company are exercisable by the individual by virtue of that shareholding;
- the company is a trading company or the holding company of a trading group; and
- the individual is an officer or employee of the company or another company in the trading group.
The change announced during the speech was that the one year timeframe would be changed to two years with effect for disposals on or after 6 April 2019.
What the Chancellor did not announce (the trick), but which emerged in the Budget documents, is a change to the first limb of the qualifying conditions. For disposals on or after 29 October 2018, the individual must now also be entitled to 5% or more of the profits available for distribution to the equity holders of the company and 5% or more of the assets available for distribution to equity holders on a winding up.
It is common to weight the voting rights and nominal share capital of a class of shares in order to ensure that employees can benefit from ER as part of incentivising performance. Any employee shareholders who hold less than 5% of the economic rights are now unlikely to qualify for ER when they dispose of those shares, even if the shares were acquired before 29 October 2018.
Where other share classes have preferential rights on a winding up, this could also cause other shareholders to dip below a 5% entitlement on a winding up and therefore cease to be entitled to claim ER.
As the timing to meet the conditions is being extended to two years from 6 April 2019, this effectively means that any employees whose share rights are changed in response to this measure will need to wait two years from the date of the change in order to claim ER.
Shareholders who acquired their shares pursuant to EMI options are still able to claim ER despite not having a 5% economic entitlement, but in respect of any disposal on or after 6 April 2019 the EMI options must have been granted at least two years prior to disposal in order to qualify.
The draft legislation for a relieving measure related to entrepreneurs’ relief was also published with the Budget documents – a treat, although one that everyone knew was coming.