There has been much speculation since the 2018 Budget that the changes made to the entrepreneurs relief rules would mean that separate share classes set up to enable the payment of dividends, would no longer qualify for entrepreneurs relief on a sale.
The area of concern was that the amended test required all share classes to be entitled to at least 5% of any profits available for distribution to shareholders. If separate share classes are used would this condition be met? It was far from clear.
In a welcome announcement just prior to the Christmas break, HMRC announced that it would be adding a second, alternative test to remove any uncertainty.
Under this test, shares will qualify provided, broadly, that the seller shareholder can reasonably expect to receive at least 5% of the total disposal proceeds assuming that the entire ordinary share capital of the company is sold. This condition must be met throughout the usual qualifying period.
The amendments should remove the uncertainty created by the initial changes, but regardless we would still recommend that all companies review their specific share structure again to confirm that entrepreneurs relief still applies.
For more information, please contact Lesley Sutton on 01484 550037 or email email@example.com.