Changes to entrepreneurs’ relief hits company shareholders hard

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Published: 11th February, 2019

LCF Law | Corporate Law | Partner | Clementine Duckett | Harrogate

A leading Yorkshire law firm is urging company shareholders to seek advice, after changes to Entrepreneurs’ Relief (ER) mean many face significantly higher tax bills, when they dispose of shares.

LCF Law’s corporate team have seen large numbers of shareholders fall foul of Chancellor Philip Hammond’s changes to ER, which were introduced during the 2018 Budget in October. ER is available for up to £10,000,000 of lifetime gains and can mean an individual pays Capital Gains Tax (CGT) on the disposal of shares in their employer at 10%, rather than at the standard rate of 20%.

The Finance Bill has now received Royal Assent and will become the Finance Act 2019. The changes mean that for company sales taking place on or after 6th April 2019, shareholders must have held their shares for at least two years, rather than the previous requirement of 12 months, to qualify for ER. A selling shareholder must also hold at least 5 per cent of the economic rights in the company, in addition to the requirement for shareholders to hold 5 per cent or more of capital and voting rights.

Clementine Duckett, who is a partner within LCF Law’s corporate division, said:

“LCF Law’s corporate team has had a record 12-months in terms of both deal size and volume, and we are currently working with large numbers of entrepreneurs who are disposing of, acquiring, investing in and growing businesses.

Advising on ER is a key part of our work, especially because the rules relating to companies with different classes of shares with differing economic rights, and the 5 per cent economic test, can be particularly complicated. These changes must be a key consideration for anyone disposing of shares, and we are working with clients to review their articles of association and any tax planning completed prior to October’s Budget.

It’s also worth bearing in mind that the changes do not apply to shares gained through the Enterprise Management Incentive (EMI) scheme, which is a popular way for employees to buy shares in their employer. These shares can benefit from ER regardless of their voting or economic rights and as a result EMI options are becoming even more attractive in the context of the recent changes.”