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Entrepreneurs' Relief: Get it in writing

Posted on 27 February 2019

Entrepreneurs' Relief: Get it in writing

Entrepreneurs' Relief has been in the news lately, mainly because of the Budget changes (and now government amendments to those changes), but the recent case of George v HMRC [2018] UKFTT 509 illustrates a key requirement of the relief. To qualify for Entrepreneurs' Relief, the taxpayer must have held at least 5% of the ordinary shares in the company, and "by virtue of that holding" must exercise at least 5% of the voting rights, for at least a year. Now, following the Budget changes, that shareholder must also hold a minimum 5% economic interest in the company.

In this case, Mr George was a key employee who sold certain shares in the company. Despite various promises by other shareholders, his shares had not carried sufficient voting rights for long enough to qualify for Entrepreneurs' Relief. He sought to argue that because of various agreements whereby the company agreed to "look after" him, his shares should be treated as carrying sufficient entitlements. The court found that because he would have had to rely not just on the rights attaching to his shares, but also those promises, he did not satisfy the statutory test.

This suggests that having additional rights outside the company's articles (for example, in shareholders agreements) in order to meet the 5% test will not necessarily satisfy the requirements for Entrepreneurs' Relief. So the moral for employees expecting to obtain Entrepreneurs' Relief is to ensure that: (a) the rights needed are conferred by the articles of the company from the outset; and (b) any hurdles, ratchets or other limits don't inadvertently prevent Entrepreneurs' Relief from being obtained.

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