Amongst the detail of the Budget 2018 were some tweaks to the entrepreneurs’ relief legislation, which led to a lot of speculation and commentary. Did the proposed change to the definition of a ‘personal company’ (in TCGA 1992, s 169S(3)) mean the end to alphabet shares?
To set some context first, ‘alphabet shares’ is the term commonly used when a company has different classes of shares which are structured in a way to allow for different shareholders to participate in distributions at the discretion of the directors (i.e. a dividend can be declared on one class of shares independently of another).
Essentially, the changes proposed at the Budget 2018 required additional tests to be met by the shareholders in order to meet the requirements of the ‘personal company’ condition. In addition to them having to hold at least 5% of the ordinary share capital which must entitle them to 5% of the voting rights of the company, they would also be required to be beneficially entitled to:
- at least 5% of the profits available for distribution to the company’s equity holders; and
- on a winding up, to at least 5% of the company’s assets available for distribution to equity holders.
This was complicated by the fact that this change came in to effect on the date of the announcement (i.e. 29 October 2018) and, because of a further change to the provisions which required the ‘personal company’ conditions to be met for a two year period ending on the date of the disposal (rather than a 12-month period for disposals prior to 6 April 2019).
After a lot of discussions and lobbying by the professional bodies, the Government responded on 20 December 2018 with a change to the draft legislation, which made clear that their intention here did not go as far as many had speculated.
Although the two new tests relating to ‘profit’ and ‘assets’ are retained, they have now been combined and joined by an alternative test which considers the individual’s entitlement to proceeds.
As such, with effect for disposals on or after 29 October 2018, to meet the ‘personal company’ test, an individual will need to:
- hold at least 5% of the ordinary share capital of the company;
- be entitled to 5% of the voting rights of the company, by virtue of that shareholding; and either be: (a) beneficially entitled (by virtue of the above 5% shareholding) to at least 5% of the profits available for distribution to equity holders and, on a winding up, beneficially entitled to at least 5% of available assets; or (b) on a disposal of the whole of the company’s ordinary share capital, beneficially entitled to at least 5% of the proceeds.
‘TAAR’ very much!
The changes to the original Finance Bill provisions were eventually enacted in Finance Act 2019, which received Royal Assent on 12 February 2019.
Although the above relaxation is a welcome revision to the Finance Bill and means that the impact of the changes is less likely to cause problems, it is always worth reviewing the company’s Articles and any shareholders’ agreement in light of these changes to makes sure that the required ‘personal company’ conditions are met.
The above article is adapted from a TACSflash published shortly after Budget 2018.