London view
Budget proposals threaten Entrepreneurs’ Relief for thousands of family businesses
Simon Warne, Partner, Tax
21/11/2018
London view
In the 2018 Autumn Budget, Chancellor Philip Hammond amended the requirements needed for individuals and businesses to qualify for Entrepreneurs' Relief (ER). This, it was announced, was brought in as an effort to protect the tax break from abuse.

However, while the Chancellor declared that the relief was here to stay, the 2018-19 Finance Bill is set to introduce changes, which are much wider than anticipated.

Simon Warne, Tax Partner, Crowe UK, comments:

Many entrepreneurs expected to be able to sell their businesses at a favourable rate of tax (10%), thanks to ER.

However, these changes proposed now threaten to deny this valuable relief to those who have a true material stake, potentially impacting a significant proportion of family businesses.

The new tests set out in the draft legislation were aimed at minority shareholders whose shares met the technical tests but were not true 5% stakes. The changes now require the individual to have at least a 5% entitlement to: 
  • profits available for distribution to equity holders
  • assets available for distribution to equity holders in a winding up.

The issue lies in the fact the proposals catch many more entrepreneurs than what appears to have been intended, and include those firmly within the spirit of the relief. For example, they appear to catch a large proportion of shareholders who have a ‘true material stake’ in a family company where there is more than one class of ordinary share capital.

Common example

Mr A owns 50 A Ordinary Shares and Mr B owns 50 B Ordinary Shares, and have been in business together for many years. Their shares rank equally in voting power and assets in a winding up. There are no other shareholders. The company’s Articles permit dividends to be voted independently between the two classes of share, but there is no minimum entitlement. 

Following the Budget announcement, neither shareholder will qualify for ER, as they have no absolute right to receive at least 5% of the dividends. This is the case even if, historically, actual dividends have been paid equally between them.

As a leading national audit, tax, advisory and risk firm, Crowe is making representations to get the proposed new rules changed as the potential collateral damage looks to be inadvertent. However, we are waiting to hear whether the tests will be relaxed so as to allow many families to continue to benefit from this valuable relief. For those family-run businesses who are likely to be impacted by these changes, it is vital they seek specialist advice where necessary.

 

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Simon Warne
Simon Warne
Partner, Private Clients
Kent