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Changes To Entrepreneurs' Relief And The Impact Of "Alphabet Shares": Make Sure Your Articles Comply

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Entrepreneurs’ relief is often a key consideration for owner-managed businesses when it comes to planning an owner’s exit from the business. Tilly Bailey & Irvine have a legal update.....

Following the Budget in Autumn 2018, the government introduced the Finance Bill 2019 which, among other matters, proposed the introduction of two extra hurdles to be jumped over for those wanting to claim entrepreneurs’ relief.

The purpose of this was to ensure that those claiming entrepreneurs’ relief are those for which it was intended, as it was felt that the current test may have been abused.

The additional conditions were originally drafted to require an individual to hold both:

  • At least 5% of the company's distributable profits; and
  • At least 5% of its assets available for distribution to equity holders on a winding up.

However, the proposed changes caused immediate concern for many as, upon their proper interpretation, it was arguable that this could cause serious problems for companies with different “Alphabet” shares.

Companies often create different share classes (e.g. A shares, B shares and C shares (“Alphabet shares”)) which could, depending on the rights attached to the shares set out in the articles of association, mean that an individual is not entitled to 5% of a company’s distributable profits. This is because, for example, the Board could choose to not declare dividends for the A shareholders. This would mean that, technically, as dividends could potentially be distributed to one class as opposed to another, no shareholder could satisfy the first test set out above.

However, the recently published Explanatory Notes and Tax Information and Impact Notes (TIINs) for government amendments and new clauses at Report Stage of Finance Bill 2018-19 reports that the Bill has been amended to have the following in place in substitution for the initial two additional conditions proposed:

“… (i) that the individual is entitled to both 5% of the profits available for distribution and assets available for distribution in a winding up or (ii) in the event of a disposal of the ordinary share capital of the company the individual would be entitled to 5% of the disposal proceeds.”

The new wording is a welcome one. Having the entitlement to proceeds of sale of a shareholding as the basis for proof of an individual’s economic stake in a company appears to be a more preferable way to move forward with the extended test.

However, despite the positive changes to the proposed legislation, the fact remains that there are coming changes to the qualification for entrepreneur’s relief and shareholders need to ensure that the articles of association for their company do not trip them up.

Articles of association that have different rights to dividends, capital and voting for the different classes of shares could all adversely impact the availability of entrepreneurs’ relief.

If you are uncertain as to whether your company’s articles of association could have such an impact, particularly if you are considering or planning for a disposal, then speak to one of our Corporate Team on 01740 646017 or visit to arrange for a member of the team to contact you.