Autumn Budget 2018: Traps for private company shareholders

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At first glance the Autumn Budget 2018 did not contain any scary surprises for businesses and entrepreneurs. But changes have been announced for Entrepreneurs’ Relief as discussed below.

The headline point is it will be business as usual for the vast majority of shareholders in private companies and the deal flow is not likely to drop due to the tax changes.  But there are changes to the rules which will need steering around as discussed.

We have summarised the key changes described in the Autumn Budget 2018 below.

Entrepreneurs’ Relief

Fears that Entrepreneurs’ Relief would be abolished have been quelled and the very generous regime stays. However, the conditions for qualification have been made slightly harder to satisfy. The conditions have been tightened up in terms of the shares held and the period of ownership.

Tightening up on the type of shares that will qualify

To qualify for the 10% Entrepreneurs’ Relief on Capital Gains Tax an entrepreneur must own shares in a trading company. The requirements of a trade remain the same but the requirements for the qualities the shares must possess have changed. Previously, the test required the entrepreneur to hold at least 5% of the share capital and 5% of the voting rights.

Now two further tests apply effective immediately. New requirements are (a) the shareholder must be beneficially entitled to 5% of the company’s distributable profits and (b) 5% of assets available on winding up the company.

Conclusion: The changes are unlikely to be that problematic in practice

Whilst the new requirements may sound complicated, for many entrepreneurs these additional tests will be met in practice by holding 5% of the ordinary share capital and voting rights. The changes could impact on certain classes of growth shares. It will be worth reviewing the share rights permitted to see if there are problems looming.

One year period of ownership now two years

To apply for Entrepreneurs’ Relief the shares must previously have been held for a minimum of 12 months. The Autumn Budget has increased this qualifying period to a minimum of two years from 6 April 2019.

Conclusion: The change is not as draconian as it could have been

With the aim of boosting technology companies, this change aims to promote longer-term investment.  This change may impact on some shareholders where an exit comes along sooner than expected within two years of the date the shares were issued.

For those shareholders caught by the two year rule the rate of capital gains tax will be 20% which is still considerably less than the rates of income tax with national insurance or dividend tax at the highest rate.