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Where Taxpayers and Advisers Meet
ER Changes: Alphabetter than They Were
04/01/2019, by BKL, Tax News - Capital Gains Tax, CGT
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BKL's David Whiscombe welcomes an HMRC rethink on Entrepreneurs' Relief.

We recently drew attention to the effect on “alphabet shares” of the changes to the Entrepreneurs’ Relief rules set out in the current Finance Bill.

Happily, the government seems to have listened to the widespread concerns: just before Christmas, amendments to the proposals were announced.

Under the amended provisions, a company will be your “personal company” if (in addition to holding at least 5% of the ordinary share capital carrying at least 5% of the company’s voting rights, as now) you meet at least one of two alternative tests:

  1. The first test (which, as many have observed, is potentially problematic for holders of alphabet shares) is that you are entitled to at least 5% of profits available for distribution;
  2. The second is that it is reasonable to suppose that if the whole of the ordinary share capital of the company were to be sold for its market value, you would be entitled to at least 5% of the total proceeds.

This second alternative should, we think, be effective in restoring relief to alphabet shares, at least in the common situation of a “quasi partnership” company where genuine co-owners use alphabet shares to maintain flexibility in allocating profits year by year without affecting the underlying equity ownership of the company. In other situations, especially where flowering shares or venture capital investment are involved, things may still need to be looked at more carefully. But in the vast majority of cases, holders of alphabet shares are in a better place than they were before Christmas. Happy New Year.

About The Author

BKL is a business name of Berg Kaprow Lewis LLP, Chartered Accountants and Tax Advisers, a limited liability partnership registered in England and Wales.

The information in this article is intended for guidance only. It is based upon our understanding of current legislation and is correct at the time of publication. No liability is accepted by Berg Kaprow Lewis LLP for actions taken in reliance upon the information given and it is recommended that appropriate professional advice should be taken.

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