The draft Finance Bill 2019 includes changes to the qualifying conditions for Entrepreneurs’ Relief. As we explained in our previous blog, the original draft legislation was messy. It was also published without any detailed guidance from HM Revenue & Customs (HMRC) to suggest how it should be applied in practice.
This lack of clarity provoked a lot of debate and concern; in particular, for holders of “alphabet shares”. On a first reading, the new rules suggested that they may no longer qualify for Entrepreneurs’ Relief and the tax liability on a sale of their shares could double.
Following this, our approach was not to jump to conclusions based on draft legislation which lacked any guidance. HMRC had stated that fewer than a thousand taxpayers would be affected by the changes. So, if the many thousands of holders of alphabet shares were to be denied Entrepreneurs’ Relief under the new rules, this would seem to have been unintended.
On reflection, our caution was the right approach. HMRC have since reined it in.
The revised draft rules
As predicted, further amendments have been made to the draft legislation. These changes go some way to tidying things up and narrow the application of the new rules. Holders of alphabet shares who qualified under the previous legislation should still be entitled to claim Entrepreneurs’ Relief where they’re entitled to at least 5% of the total value of the company.
We’re still waiting for HMRC to publish guidance on how the rules should be applied in practice. Once we’ve received this, we’ll follow up with more details on the conditions that need to be satisfied by shareholders who wish to benefit from the Relief when they come to sell their shares.
Where does this leave us?
So, on the face of it, the revised legislation is good news for most taxpayers. But these changes do show that HMRC are targeting those taxpayers who do not have a 5% economic interest in a company. This means certain shareholding arrangements are still likely to be denied Entrepreneurs’ Relief; for example, where the capital rights of shares mean that the holders are entitled to less than 5% of sales proceeds. We’ll follow up with more detail on this soon.
If you’d like to discuss how you may be affected by the changes, please get in touch.