Entrepreneurs’ Relief changes - introducing the new personal company conditions
As part of the Budget 2018, the government announced proposed changes, tightening the qualifying conditions for Entrepreneurs’ Relief, and said this would affect no more than 1,000 people. As a result, it was expected that an individual would need to have at least 5% beneficial entitlement to dividends in order to qualify – in addition to the pre-existing requirements.
Entrepreneurs’ Relief in the Budget 2018 spotlight
An attack on Entrepreneurs’ Relief had been expected for some time, but professionals looked at the proposed changes with horror as the names of potentially afflicted clients built in their minds, notably individuals holding growth or alphabet shares who did not necessarily have any beneficial entitlement to dividends. Had the government missed some zeros from their statistic?
Many leapt to analyse the proposed legislation and found it to be almost impossible to apply to real scenarios due to incompetent drafting. De-risking the clients they had in mind was looking as improbable as the government justifying their “1,000” people. The rising sense of dread grew, and some advisors even suggested clients delay certain transactions pending further guidance.
Finance Bill 2019 to the rescue
Thankfully, following lobbying from professionals, an amendment to the draft Finance Bill 2019 has now been tabled which seeks to address the issue. Strangely, rather than amending or removing the poorly drafted clauses, a new condition has been bolted onto them which essentially removes the need to have a 5% or greater entitlement to dividends. For many that were previously at risk, this could be their Get Out of Jail Free card.
Introducing the new personal company conditions
Before you attempt to pass “Go” and claim your relief, consider this. The new condition is met if you would be entitled to 5% of the proceeds in the event of a hypothetical sale of the company’s entire Ordinary Share Capital (“OSC”). It requires you to assume that this hypothetical disposal is at market value, as at the date of your disposal.
For example, if the hypothetical value of your company’s OSC is £10m and you have an entitlement to £500,000 or more of this in the event of a sale, you would meet the new condition. That would typically be the case if you had 5% or more of the OSC, provided these were “vanilla” shares that provided entitlement to disposal proceeds pro-rate to shareholding.
However, you might have to surrender that Get Out of Jail Free card if you are entitled to, say, a fixed return of proceeds on disposal. If, for example, you have 5% of the OSC of a company worth £10m but are only entitled to £400,000 of disposal proceeds, then the new condition will not help you. In such situations, the market value is likely to attract scrutiny. Valuations are naturally subjective, but unnaturally difficult to agree with HMRC.
Non-“vanilla” shares may raise further questions. HMRC indicate, for example, that shares offering a fixed percentage dividend on a cumulative basis will not be considered OSC. Such shares might, however, offer a right to disposal proceeds that together with your “vanilla” shares, takes your actual entitlement to proceeds above 5%. For the purposes of the new condition though, these fixed percentage dividend shares would be ignored as they are not OSC; possibly resulting in a failure to meet the new condition.
If you cannot make use of the Get Out of Jail Free card, back you go to jail and pray that your advisor will be able to engineer an escape for you using the other conditions. Even with good behaviour, you might be looking at a minimum term of two years behind bars before you can get your Entrepreneurs’ Relief. It is recommended that shareholders seek professional assistance now.