Business owners usually have much to fear from the government’s budgets. This year such fears were unfounded, even though it was widely suspected that the government would substantially attack entrepreneurs’ relief – this being the very generous series of rules which can enable those selling shares in private companies to pay only ten per cent tax.
The only immediate changes for business owners did, however, relate to entrepreneurs’ relief.
The first is probably not a concern:
- The budget extended the period of ownership before shareholders can get the benefit of entrepreneurs’ relief from one to two years. Hence, there is now a longer qualification period before entrepreneurs can pay as little as 10 per cent on sales of their shares.
The second may not be a concern but does require action:
- Philip Hammond tightened the rules as to entrepreneurs’ relief so that it is not available where there are classic “alphabet shares”. Such shares usually work so that dividends are at the discretion of the directors. Shareholders must now be absolutely entitled to at least 5% of the distributable profits and assets on a winding up of a company – or they will not be able to pay tax at ten per cent. Hence, most alphabet shares will be ineligible for entrepreneurs’ relief on disposal unless the articles rank all share classes pari passu or give a right to the correct proportion of every dividend declared.
All owners of private company shares should check their articles and consult with their advisers. The issue can be addressed by adjusting the rights attaching to the shares.
By Mark Lucas
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