Andy McNish – Partner in our Corporate & Commercial department – discusses the recent changes to Entrepreneurs’ Relief


Entrepreneurs’ Relief is a key Capital Gains Tax relief which may be available when a shareholder who is an employee or officer of a trading company sells his or her shares in that company.

If it applies it reduces the CGT rate to 10% (up to a lifetime limit of £10m per person).

The Finance Act 2019 made qualification for this relief more difficult in a couple of ways.

First, and most importantly, the period for which you need to hold qualifying shares before becoming entitled to the relief has increased from one year to two years.

Secondly – the Finance Act 2019 changed the ‘personal company’ test (retrospectively as from 29th October 2018).

Details of ‘personal company test’ changes

Note that the personal company test as a whole does not apply to those who acquire their shares by way of Enterprise Management Incentive (EMI) share options schemes.

The old test was pretty simple – you had to hold shares which gave you 5% of the voting rights in the company and represented 5% of its issued ordinary share capital. This is still the case but the changes added two value tests, at least one of which must be met:

  • the individual is beneficially entitled to at least 5% of the profits available for distribution to equity holders and to at least 5% of assets available for distribution to equity holders on a winding up (‘the profits and assets test’); and/or
  • in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds (“the sale proceeds test”).

The most common shares which may fall foul of these additions are so-called ‘growth shares’- which are often issued when a person joins an existing company as a co-owner but does not have the funds to fully buy-in. The share capital of the company is split into ‘freezer shares’ owned by the existing shareholders (with a fixed exit/winding-up value equal to the agreed value of the company at the date the new co-owner joins) and ‘growth shares’ (with a nil value at that date, but which are entitled on an exit to any excess value the company has then accrued above the freezer share value).

The problem is that, on day one, even if the new co-owner has a large number of growth shares relative to the other ordinary shares in issue and these have full voting rights, the growth shares held by him or her will not pass either of the new value tests. Nor will it always be clear when they do (and so start the two year clock running for qualification for Entrepreneurs’ Relief).

This could be a nasty surprise for the co-owner if the company is sold, say 3-4 years down the line, and he assumes that he qualifies for a 10% CGT rate.

So if you are thinking about using this mechanism for a new co-owner then you should make sure whoever does the restructure for you recognises this issue and takes appropriate steps to mitigate it.

For more information about Andy and his work, please click HERE.

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