To qualify for ER from a disposal of shares this must be from a personal company.

Previously that meant you must be employed by or an officer of the company and hold at least 5% of the ordinary share capital and voting rights.

In the most recent Budget, the Chancellor announced some further conditions which must be met for shares in a personal company to qualify for Entrepreneur’s Relief. Now you must also have a beneficial entitlement to at least 5% of company’s distributable profits as well as a right to at least 5% of net assets available to equity holders on winding-up.

Why have the qualifying conditions been widened? It was felt by HMRC that the use of share classes may have been adopted by some to exploit the relief, however it seems the changes may have a more significant effect on perfectly acceptable structures – such as alphabet shares.

What effect: even if you hold a majority of shares in an alphabet share structure and would always vote for a distribution to your share class, that does not necessarily constitute an entitlement. It would need to be specified in the Articles of Association.

If a company has two 50% shareholders, of different classes, which rank equally in voting power and assets on winding-up, BUT the Articles allow dividends to be voted independently between the two classes, both shareholders would now lose Entrepreneur’s Relief.

This can be rectified by amending share rights. However, this will need to be done pro-actively as any changes would trigger the beginning of a new qualifying period in advance of any winding up.

How far in advance? This leads us to the second significant change to Entrepreneurs Relief. Currently qualifying conditions for ER must be met for at least one year, from 6th April next year the qualifying conditions will need to have been met for two years prior to disposal.

Is this a direct attack on ER or sloppy legislation? We will let you decide that for yourself, but if you don’t take action in advance, it may have significant consequence in the future.

If you believe you could be affected by these changes, contact Elysium Chambers for a comprehensive review of your share structure and the implications of the budget changes.

It is possible that these unintended and far reaching effects of the budget changes will be examined and revised before Royal Assent. However, shareholders of unquoted trading companies should review their position, especially where those companies have difference classes of issued share capital.

David Brogelli