On 29 October 2018, Philip Hammond delivered his autumn budget.  Following widespread speculation, the budget confirmed changes to the conditions which must be satisfied for shareholders to take advantage of entrepreneurs relief (ER) on a disposal of their shares.

Existing conditions

Under current legislation, ER is generally available to a shareholder who:

  • holds shares in a trading company (or the holding company of a trading company);
  • is an officer or employee of the company;
  • holds 5% of the nominal share capital; and
  • holds 5% of the voting rights.

Provided that the above conditions are met for a period of 12 months before the disposal, the shareholder should qualify for ER and will benefit from a generous capital gains rate of 10% on up to £10m of lifetime gains.

Proposed changes

Crucially, under the existing conditions, whilst there are requirements concerning voting rights and nominal value, there are no requirements for a shareholder to have any specific entitlement to dividends or return of capital.

As a result, many companies have issued shareholders with special classes of shares that carry the requisite voting rights, but do not carry fixed or minimum capital or, crucially, dividend rights. Under the existing regime, these shares should qualify for ER.

However, the proposals in the autumn budget stipulate new conditions, which are that:

  • the shareholder must now be entitled to at least 5% of the company’s distributable profits; and
  • the shareholder must have a right to at least 5% of the net assets of the company on a winding up.

In addition, the qualifying period during which the conditions must be met has been extended from 12 months to 24 months.


Whilst the logic behind the changes are apparent (that the relevant shares truly represent 5% of the underlying economic interest in the company), it may be that there are some unintended adverse consequences for shareholders who hold alphabet shares, growth shares or other classes of shares which have special rights.

Many companies have an alphabet share structure which allows the company to pay different dividends on different classes of shares.  It is, however, not common to see any guaranteed minimum percentage return of dividend rights. Accordingly, there is arguably no certainty that those shareholders are guaranteed to receive the requisite 5% of distributable profits required to qualify for ER.

Based on the initial draft of the legislation, this is a significant problem which puts the availability of ER at risk for many shareholders.  HMRC has received numerous challenges to the draft and it is hoped that these challenges result in an amendment to the legislation to address this, however until the final draft of the legislation is published, this cannot be guaranteed.

In the meantime, we would recommend you consider your existing share structure and whether the changes may have an adverse effect on the availability of your ER.  When the legislation is finalised, it is recommend to tax the appropriate advice to ensure suitable changes are made, where necessary.

If you wish to discuss any of the issues concerning the availability of ER, please contact our corporate team.