Further amendments to entrepreneurs’ relief

The Finance Bill published following the Chancellor’s Budget on 29 October 2018 introduced two major changes to entrepreneurs’ relief (ER). Both are designed to reduce the number of shareholders able to qualify for the reduced (10%) capital gains tax rate. 

Following lobbying and representations to HMRC (to which BDO were a significant contributor), a new ‘alternative’ equity test has been included in an amendment to the Finance Bill which will allow more minority shareholders to qualify for ER than previous thought. 

In practice, the new equity test could be satisfied where a UK taxpaying individual has a class of share which delivers at least 5% of the equity value on exit - even if these shares had not been entitled to 5% of proceeds (or amounts on a notional winding up or dividend rights) throughout the ER qualifying period. 

We view this as a welcome change to the original proposals and the final rules should be considerably more straightforward to apply to UK individual shareholders in typical private equity transaction structures. The new test is particularly helpful in this context because:

  • The ‘original’ equity test would likely be very hard for management shareholders to interpret given the potential for the portfolio company debt structure to affect the result, and
  • Management often hold shares which are not guaranteed to deliver 5% of the equity value on exit, but which may do so if the share value increases significantly (eg shares including a ratchet or other performance conditions). In such scenarios, it is possible that ER could still apply subject to also meeting the other existing qualifying conditions (eg employment, 5% ordinary share capital, 5% voting rights and 24 month holding requirements).

You can read more on the recent changes to ER here.

Please let us know if you would like us to talk through the specifics of your structure or if you have any queries on the above.

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