One of the most unexpected changes to arise from the recent Budget was the introduction of new qualifying criteria on entrepreneurs relief. As a result, those who previously benefited, may need to restructure the shareholding of their personal company to ensure they will still qualify.
Historically, it has been relatively simple to qualify from entrepreneurs relief and a lot of planning has been targeted at ensuring shareholders benefit from the relief. The criteria was previously:
- At least 5% shareholding in a trading company;
- The shares must be voting shares;
- The shareholder must be an employee or director of the company;
- The qualifying shares must be held for 12 months.
Qualifying period up to 24 months
These criteria remain in place, although the shareholding must by qualifying for 24 months rather than 12 months for disposals on or after 6 April 2019. However, in addition to the above, there is a new ‘economic test’ which applies with immediate effect.
New economic test
The economic test means that you must now be entitled to at least 5% of the company’s distributable profits and the distributable assets on winding up. Commonly with family companies, the company articles have given the director control of who can benefit from dividends. Together with issuing different classes of shares, this has proven beneficial for tax planning to ensure all family members benefit from allowances and lower tax rates. However, going forward, this could be jeopardising the claim for entrepreneurs relief if there is no entitlement to 5% of reserves. The introduction of the recent change means that more control on share rights will be required going forward.
Do your company articles and shareholders agreement need updating?
Your company articles and shareholders agreement may need updating to ensure that you will qualify for entrepreneurs relief. Even if you are not looking to sell your shares in the near future, you can no longer take for granted that you qualify for entrepreneurs relief, the company Articles will be required to give the share class a right to dividends and company assets. In light of the extended holding period and the potential for company circumstances to change unexpectedly, we recommend that you review this now, rather than leaving it until it is too late.
Please get in touch if you are concerned that you might no longer qualify for entrepreneurs relief. We would be happy to review the new qualifying criteria with you.
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.
