Alphabet shares can be used to pay varying dividend rates to different shareholders. The updated test introduced in the 2018 Budget appeared to threaten entrepreneurs' relief for these. What's the latest?
Recap: The 2018 Budget made changes to the definition of a "personal company" for entrepreneurs relief (ER). Since 29 October 2018 for a company to be a shareholder's personal company they must own or control 5% or more of the company's share capital, be entitled to at least 5% of its distributable profits and at least 5% of its net assets if it were wound up.
Alphabet shares: The trouble with the Finance Bill as originally drafted was that it appeared to prevent ER from applying to ordinary alphabet shares (ordinary As, ordinary Bs and so on). Inevitably each class has different rights which means there can be no certainty of what distributions (dividends) and capital on winding up each class is entitled to. It follows that the "5% of profits" and "5% of capital on winding up" conditions for a company to count as a shareholder's personal company can't be met and so a claim for ER will fail. This potential problem was highlighted by the professional tax institutions, and representations were made to the government accordingly.
Amendment: It appears that the plea has not fallen on deaf ears, and the government has tabled an amendment to the relevant sections of the Finance Bill. This retains the new conditions as originally drafted, but adds an alternative condition in the event a shareholder can't meet them. The amendment says that a company will be a shareholder's personal company (and thus meet the conditions for ER) if they would be entitled to at least 5% of the net proceeds if (hypothetically or actually) all of the company's share capital was sold.
This removes any ambiguity relating to unquantifiable rights to distributions and capital, but means that a valuation of the company will need to be undertaken ever time alphabet shares are sold. It may be worth seeking clearance from HMRC in respect of the sale to avoid any problems and claw-back of relief, especially if an individual's shareholding represents only just over 5% of the total ordinary share capital.