ER and alphabet shares

Entrepreneurs’ Relief (ER) and alphabet shares: some good news

When the draft legislation concerning the Budget was released a week after the Budget itself the tax profession realised that unfortunately it was very poorly drafted.  It resulted in there being a real possibility that ER may NOT be available to a shareholder who disposes of their shares – where the company concerned has more than one class of shares – irrespective of how much equity the shareholder owns in the company.

This seems completely counterintuitive but the issue arose because the draft legislation stated that an individual must be entitled to at least 5% of the distributable profits (i.e. dividends).  The problem with a company having more than one class of share is that the Articles normally allow the directors the flexibility to vote dividends on each class of share i.e. the directors could decide not to vote a dividend on one of the classes of share. Consequently, in this scenario no individual share class carries an entitlement over the distributable profits, resulting in ALL shares failing this new test. In such a case the only way a person could get ER would be if they held more than 5% in each different class of share – and where a company has different classes it is usually for a reason, and one person taking part in all classes is pretty unlikely.

Thankfully, there is now some good news to report on this issue.  The draft legislation has now been changed which has eliminated the problem. An additional piece of text had been added which means that where a company with alphabet shares is disposed of, then, provided the shareholder receives at least 5% of the proceeds they can qualify for ER, even if they have not received equal dividends.

It is good to hear that HMRC did listen and changed something which had unintended consequences. They even sent a nice letter to the people involved in amending the draft legislation, thanking them for helping HMRC to resolve the issue.

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Mar 19

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