We outlined changes to the definition of a personal company for entrepreneurs’ relief in our newsletter on 1 November 2018. The two new conditions added to the definition are:
- a right to at least 5% interest in the distributable profits; and
- a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.
The new definition of a personal company takes effect for disposals made on and after 29 October 2018, but drafting the law to implement the intended effect has proved difficult.
The primary problem is where the company has issued so-called “alphabet shares”. This sub-dividing of the ordinary share capital is done so that different amounts of dividend can be paid to different shareholders. Some shareholders may not receive a dividend, and thus would have difficulty in proving they were entitled to at least 5% of the distributable profits.
The government has listened to concerns and has introduced a late amendment to the Finance Bill including another test for a personal company, which says: “in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.”
In other words; will the shareholder be entitled to at least 5% of the proceeds in the event of the disposal of the whole company. This test will also apply from 29 October 2018 as an alternative to the two new tests listed above.
The same Finance Bill amendment also changed the rules which restrict ER being claimed on gains arising from goodwill sold to a close company, to incorporate the new definition of personal company into those rules.
If you want to take advantage of entrepreneurs’ relief on a disposal, please call our office to double check that all the conditions are met, as it is better to be safe than sorry later.
Written by the Tax Advice Network