The 2018 Budget has caused significant concerns for shareholders in companies that have multiple share classes carrying different rights and entitlements (also known as alphabet shares).
The new proposed rules change the definition of ‘personal company’ in the ER legislation in such a way as to prevent shareholders in a company with alphabet shares from claiming ER; our article of 16 November 2018 discussed the old and proposed new rules.
We have had a number of clients requesting that we review company articles and provide opinions on whether there is a risk of losing this valuable relief.
On 21 December 2018, the Government proposed a significant amendment to the Finance Bill rules defining what constitutes a ‘personal company’ for ER purposes.
The revised legislation retains the old qualifying criteria (that the shareholder must have at least 5% of the ordinary share capital of the company and 5% of the voting rights) but adds in two new conditions, at least one of which will need to be met:
- The shareholder must be entitled to 5% of the profits available for distribution to equity holders and 5% of the assets available for distribution on a winding up (these were the changes originally announced in the 2018 Budget);
- In the event of a disposal of the ordinary share capital of the company the shareholder would be entitled to 5% of the disposal proceeds.
Additional provisions set out the process for determining whether the second test is met at any one time. The legislation does not define the term ‘proceeds’, which implies that it may extend to some payments made to debt-holders on a sale of a company.
In its rationale for making the changes, the Treasury has stated that it has laid these amendments to ensure that the conditions for benefitting from the relief operate as intended and to continue ‘supporting enterprise creation and growth in the UK.’
As our previous article stated, many private companies’ articles of association will need to be carefully reviewed to establish whether shareholders would meet the qualifying conditions, particularly where shareholders have structures like liquidation preferences and growth shares. Changes to company articles of association to remedy any defects could restart the new two-year clock for ER.
Abbey tax are offering practitioners a review of entitlement to ER for shareholders up until 31st March 2019, which would include an opinion on company trading status and the impact of the new rules. We will prepare a written paper confirming whether or not ER is eligible based on information provided and the current rules and proposals with suggestions on what action should be considered to improve the position where applicable. The cost of this review would be fixed at £950 plus VAT. For more information on this matter, please contact Martin Mann on 0845 4900 509 or email us on email@example.com.