Good news for alphabet shareholders

Owners of companies with different share classes (e.g. alphabet shares) will have been concerned by the changes announced in the Autumn Budget that had threatened their entitlement to entrepreneurs’ relief (“ER”).  Following considerable lobbying by professional organisations, an amendment has been tabled by the government to protect this relief.

To qualify for ER on the sale of a company, prior to the Autumn Budget, the requirements were that:

  • at least 5% of the ordinary shares and voting rights were owned by the vendor;
  • the vendor was an employee or officer of the company; and
  • these conditions had to be met for at least 12 months prior to sale.

The changes announced in the Autumn Budget increased the minimum holding period to two years for sales on or after 6 April 2019.

In addition, with immediate effect, vendors must be entitled to at least 5% of the profits available for distribution and at least 5% of the net assets of the company, in addition to the existing requirements on share capital and voting rights.  This announcement caused a significant level of anxiety as it could frequently exclude alphabet shares, where the absolute right to dividends or assets did not flow equally to the shareholders with different share classes.

The Finance Bill has now been amended to introduce a further alternative test to these two Autumn Budget requirements.  This 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, ignoring previous rights to dividends for example. 

The Finance Bill is expected to receive Royal Assent in the next few weeks, and we await further guidance on the new tests.  In the meantime, the amendment is good news for owners of alphabet shares who were not able to meet the original tests and would otherwise have had to consider changing the terms of their share classes and waiting for a further two year holding period to elapse before qualifying for ER.