• Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer
  • Home
  • About
  • Contact

Daily Business Magazine

A magazine complement to the Daily Business website

  • Life, Arts & Leisure
    • Creative
    • Festival
      • Festival Reviews
    • Film
    • Food & Drink
    • Stage Shows
    • Life
    • Leisure
      • Rio Recommends – dog walks and cafes
    • Homes
    • Style
    • Travel
  • Opinion
    • Bill Magee
    • Craig Alexander Rattray
    • Karen Harvie
    • Keith Anderson
    • Russell Dalgleish
    • Terry Murden
  • Interviews
  • Notebook
  • Working Life
    • Careers & Management
    • Finance and legal
    • Technology
      • Tech Talk
    • Well Being
  • Daily Business News
    • All Content

Entrepreneurs’ relief: welcome developments

January 29, 2019 by Keith Dinsmore of Vialex Leave a Comment

We last detailed some key changes to the Entrepreneurs’ Relief (ER) regime announced in the October Budget in our article Entrepreneurs’ Relief: The Net Tightens for Owner Managers. Since then, there has been significant lobbying on one of the changes, resulting in the government proposing a welcome amendment to the Finance Bill in late December.

The Bill is still going through the Parliamentary process so could be subject to further change, but the main debate stages in the House of Commons are now concluded.

The Budget contained three changes to the ER regime worth noting:

  1. The holding period will increase to 2 years (from 12 months) for disposals taking place on or after 6 April 2019.
  2. Where individuals are diluted below 5% as a result of a fresh issue of shares for cash, it may be possible to make an election to “bank” the ER accrued up to the time of dilution and also to elect to defer that tax until the shares are actually sold. This will apply for qualifying share issues taking place on or after 6 April 2019.
  3. On Budget Day (29 October 2018), it was announced that with immediate effect, in relation to a sale of shares, the selling shareholder must hold 5% of the economic rights in the company (in addition to the nominal capital and votes, which were previously the only requirements).

The Proposed Amendment

The proposed amendment to the Bill is in relation to change 3 above – the ‘economic rights test’ – and will, if adopted, address what has been deemed an unintended and undesirable consequence of the updated ER regime. The tabled proposal is that an individual will meet the 5% economic rights test (which, as with the other conditions for ER, must be met throughout the qualifying period up to and including the date of sale) if either:

  • he or she is entitled to at least 5% of both the company’s profits available for distribution and assets on a winding up (the test announced in the Budget); or
  • on a sale of the whole of the ordinary share capital of the company, he or she would be beneficially entitled to at least 5% of the proceeds available to the holders of ordinary shares (the new proposed alternative test).

The main concern with the test announced in the Budget was that shareholders who would previously have been expected to qualify for ER without difficulty, may in fact fall foul of the 5% economic rights test because their shares (albeit well over 5% of the ordinary shares in the company) rank behind other shares on liquidation, or because the shares in question were growth shares and rank behind other classes. Similarly, there was a concern around “alphabet shares”, as arguably no class has an entitlement to 5% where there is discretion over dividends.

The new alternative economic rights test (looking at proceeds on an exit) means that an individual with a genuine 5%+ economic stake in the value of the company should be able to qualify for ER, even if he or she would fail on the entitlement to dividends and assets on a winding up test. In practice, this is going to be the test shareholders will rely upon most often to qualify.

However, care will still need to be taken in identifying the “ordinary share capital” of the company for the purposes of this new test, particularly around the detailed rights attaching to preference shares and whether this makes them ordinary share capital or not.  If preference shares count as ordinary share capital, the ordinary shares in question would need to be entitled to 5% of the amounts payable to all ordinary shares, including the preference shares (which is obviously harder to meet than if you exclude the preference shares from this computation).

Impact

Although the introduction of a new test has allowed many to breathe a sigh of relief, it still has complexities and many of the strategies employed in pre-Budget planning will still fall foul of qualification for ER under these new provisions. To give an example of this, it was quite common for an individual to hold an economic stake in the business below 5%, but still seek to qualify for ER by virtue of the shares having weighted nominal value and voting rights above 5%. However, this would no longer meet either strand of the economic rights test.

It is encouraging to note that the Enterprise Management Incentive (EMI) rules are unaffected by the economic benefit test outlined above. The only change affecting EMI option holders is the extension of the holding period to two years, rather than the current twelve months, from the date of grant. This makes EMIs an even more attractive option and they should be considered as a means of getting shares to employees where possible. They could also be considered as a possible “fix” to any problems identified in ER entitlements.

Recommendation

We would recommend that, especially where a sale is being considered, advice should be taken on the company’s articles of association and any shareholders’ agreements to ensure compliance with the new provisions. The review would be aimed at working out which shareholders continue to qualify for ER in light of the amendments under the Bill and, where possible and appropriate, taking steps to maintain ER if it is in jeopardy. It will likely only be possible to maintain ER by increasing the economic benefits of the shareholder and this will not be appropriate, or even desirable, in all cases and could have tax implications in itself. However, if it can be done, it is best to make the changes sooner rather than later (particularly as the holding period is increasing to 2 years).

The Finance Bill is still going through the Parliamentary process so could be subject to further change, although the main debate stages in the House of Commons are now concluded.

Nothing in this article constitutes legal or tax advice or gives rise to a solicitor/client relationship. Specialist legal and/or tax advice should be taken in relation to specific circumstances.

Keith Dinsmore is Head of Transaction Services at Vialex

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)

Related

Filed Under: Finance and legal, Keith Dinsmore, Working Life Tagged With: Entrepreneurs Relief, finance bill, Keith Dinsmore

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar



Editor’s Pick

Bill Magee

Securing safe passage to the metaverse economy

Terry Murden

… [More...] about Securing safe passage to the metaverse economy

Tim Key

Review: Tim Key – Mulberry

Andy Moseley

… [More...] about Review: Tim Key – Mulberry

Sook Edinburgh

Pop-ups give stores a new lease of life

Julena Drumi

… [More...] about Pop-ups give stores a new lease of life

Jason Byrne

Byrne and Bishop to play brain tumour gig

Julena Drumi

… [More...] about Byrne and Bishop to play brain tumour gig

Advertising



Footer

  • All Content
  • Site Map
  • Privacy Policy
  • Facebook
  • Twitter
  • Instagram
  • Email
  • LinkedIn
  • WordPress

Copyright © 2022 · Design by jPAD Consulting · Magazine Pro · Genesis Framework

We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept”, you consent to the use of ALL the cookies.
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT
 

Loading Comments...