Entrepreneurs’ Relief Changes Could Catch Business Owners Out
Phillip Hammond announced a number of changes to the Entrepreneurs’ Relief (ER) regime in his Autumn Budget but there is one change in particular that could catch out shareholders without them realising.
Previously, to qualify for ER a shareholder had to hold at least 5% of the voting rights in the Company being sold, but the regulations have been tightened so that as well as having 5% of the voting rights, the shareholder must now also be entitled to 5% of the distributable profits and net assets of the Company.
We have seen a number of structures in the past where shareholders have been given voting rights to ensure that they qualify for ER but they have not been entitled to more than 5% of the dividends or 5% of the proceeds on a sale. In these scenarios the shareholders (who thought they qualified for ER) could find that they no longer qualify and will lose their right to benefit from ER.
We would advise any companies that have different classes of shares with varying rights to voting and dividends to look very closely at the drafting in their articles of association and to ensure that they understand the full implications of how these are structured.
This could lead to some difficult conversations however, as whilst the majority shareholders may have been prepared to give away minority voting rights to give their smaller shareholders a tax break they are clearly going to be less inclined to give away the equivalent level of rights to dividends and proceeds of sale.
If you need advice on the implications of the drafting in your company’s articles of association then please feel free to contact Andrew Hoad or any other member of the Corporate Team.
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