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ER changes: alphabetter than they were

David Whiscombe welcomes an HMRC rethink.

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.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Anthony Newgrosh

Partner, Head of Business Tax

T +44 (0)20 8922 9144

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