The main changes are summarised below.
For disposals made on or after 6 April 2019, individuals will need to meet the qualifying conditions for entrepreneurs' relief for a minimum of two years, doubled from the current 12 month holding period.
The 2018 Budget also included an announcement that, for disposals after 29 October 2018, two new tests would added to the definition of "personal company", requiring the shareholder to be beneficially entitled to at least:
- 5% of the company's distributable profits; and
- 5% of its assets available for distribution to equity holders on a winding up.
Following lobbying by professional organisations, the Finance Bill has been amended to introduce an alternative test into the definition of "personal company" which can apply instead of the original two tests introduced at Budget 2018.
The alternative test is based on the shareholder's entitlement to at least a 5% share of disposal proceeds in the event of the company being sold. This new alternative test is intended to help those who are not able to meet the original tests for commercial reasons – for example, where there are "alphabet" share classes or where investors have preferential rights to dividends (and so shareholders are not entitled to at least 5% of the company's distributable profits).
The Finance Bill is expected to receive Royal Assent in the next few weeks, and guidance on the new tests is awaited. For now, this change (if enacted) could be quite important and helpful for some individuals, as it is intended to allow those claiming entrepreneurs' relief "to use their entitlement to the sales proceeds of the company as evidence of their economic stake, in circumstances where their entitlement to the profits and assets of the company cannot be demonstrated".
Note that the 5% "personal company" test does not apply to enterprise management incentive (EMI) options, but the extended two year holding period will apply to EMI options (for disposals made on or after 6 April 2019).