The Chancellor has announced two far reaching changes to the rules on Entrepreneurs' Relief (ER) on share sales which will severely restrict the availability of the relief, if enacted.
The first change means that an investor would now need to hold 5% of the "economic rights" of the investee company to qualify for ER, not simply 5% of the issued ordinary share capital and voting power of the company. The 5% "economic rights" test looks at the rights of all "equity holders" in the company. "Equity holders" include non-bank lenders to the company where the loan contains "non-vanilla" features such as conversion rights, rights to payment in kind or PIK notes and/or a redemption premium well as the holders of preference shares (other than fixed-rate cumulative preference shares). This change would mean that many structures which have been put in place to allow shareholders to qualify for ER may no longer be effective.
This change is proposed to come into effect for disposals on or after the 29 October 2018 (Budget Day) so would have immediate retrospective effect on shareholders hoping to obtain ER on a future disposal. This change does not apply to EMI optionholders.
The second change, which would take effect for share disposals on or after 6 April 2019, would extend the qualifying ER holding period for all shareholders and EMI optionholders from 12 months to 2 years.
Any shareholder who is planning to claim ER should speak to their usual Osborne Clarke Tax or Corporate contact to check whether they will still qualify for ER if the Budget changes are enacted and what remedial steps can be taken, if that is no longer the case.