Now that the dust has settled on the Chancellors “giveaway” budget, closer examination reveals one lesser reported change will require owners of private companies to urgently check the entitlements attached to their shares.
New capital gains tax rules for small shareholdings gives some indication on how the Chancellor’s new spending measures are being funded. The details point to a tightening of the rules surrounding the availability of the hugely popular “entrepreneurs” relief, which cuts the capital gains tax liability on a qualifying disposal to 10%, and is a key consideration in most company transactions in the SME sector.
The Chancellor had been under some political pressure to claw back the scheme to prevent misuse and in the face of such scrutiny two important changes will now apply.
These are that a shareholder must have an entitlement to at least 5% of the Company’s distributable profits. Also, the shareholder must be entitled to at least 5% of the Company’s assets available for distribution to equity holders in a winding up.
Critically, the new tests must be met throughout the specified period of share ownership.
One further change is that from April 2019 the minimum period for which the various conditions must be met will be increased from one year to two years.
These adjustments are unlikely to impact on the shareholdings of company founders, who are unlikely to hold shares which fail either of the new tests. They are far more likely to be felt by senior management or key employees who have acquired a small number of shares with limited rights.
If this applies to your company you are urged to check the rights which apply to your shares and those of your colleagues to see if you are affected. Failure to do so could mean that what is expected to be a tax efficient gain crystallising on the sale of your company could become far less lucrative than first thought.
Pinney Talfourd’s Corporate Department is ideally placed to urgently advise you if you might be at risk, and what options might be available to you.This article was written by Edward Garston, Senior Associate at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of October 2018.