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Budget Changes for Entrepreneurs' Relief

Entrepreneurs’ Relief (“ER”) is a valuable tax relief for many founders and owner managers and a key consideration in exit planning. Where the qualifying conditions are met, individuals pay Capital Gains Tax on a disposal of shares at a rate of 10% rather than the standard rate of 20%.

However, the Autumn Budget brought in some changes to this regime which have the effect of tightening up the qualifying criteria in relation to ER.  

Previous Position

  • The 5% test i.e. the individual must hold 5% of the share capital and exercise at least 5% of the voting rights in the company;
  • The individual must be an employee or officer of the company, or of another company within the same group;
  • The company must be trading (or be the holding company in a trading group).

The above conditions had to be met for a period of 12 months prior to disposal of the shares (the “Qualifying Holding Period”). Shares purchased by employees under EMI Options had the advantage that meeting the 5% test was not required and the Qualifying Holding Period was treated as starting from the date of grant of the option rather than the date of share issue at the point of option exercise.

New Position

  • The 5% test has now been extended so that in addition to the 5% conditions noted above, the individual must also have at least a 5% interest in the profits available for distribution to equity holders and in the net assets available to equity holders on a winding up (this change took effect from 29 October 2018); and
  • The Qualifying Holding Period has been increased to 24 months (this change will affect disposals on or after 6 April 2019).

The new 5% test still does not apply to EMI options, but the extended Qualifying Holding Period test does (i.e. shares acquired via the exercise of EMI options must have been granted at least 24 months prior to disposal, or 12 months prior for any disposals prior to 6 April 2019).


The extension of the 5% test has some important implications. In particular, those intending to claim ER on a future disposal of shares should consider the following:

  • The new additions to the 5% test refer to “equity holders” rather than shareholders. The definition of “equity holders” has the possibility of capturing some debt, so the terms of loan notes and other financial instruments may need to be reviewed.
  • Companies should also review any liquidation preferences or similar ratchet mechanisms contained in their Articles of Association as these will have an impact on distribution of capital amongst shareholders.
  • If you have multiple classes of shares (e.g. alphabet shares), there are concerns where directors have discretion to approve a dividend for certain classes of shares, but not others. If a company has a history of declaring dividends for one share class, but not others, or if a particular class of shares has a preferential right to dividends, this may also cause issues for ER.
  • Growth share schemes may need to be reviewed because growth shares often only carry the right to share in the assets of a company once a certain hurdle has been achieved in circumstances where the growth shares have voting rights but no or only nominal rights to income.


Any shareholder planning to rely on ER should review the company’s Articles of Association and other investment or financial documentation to ascertain whether there any potential barriers to ER being obtained on a disposal of their shares. If in any doubt, professional tax advice should be obtained.

Some hurdles to ER can be overcome by restructuring, but given the 24 month Qualifying Holding Period, founders and owner managers should plan early for a potential exit.

If you would like to discuss structuring your company for exit, please get in touch with Laura Peachey.

MBM Commercial LLP does not provide tax advice, nor is this article intended to constitute tax advice. If in doubt, please seek advice from a professional tax adviser.

If you would like to find out more then please contact Laura Peachey at or on 0131 226 8234. Laura is a Director in MBM Commercial's Corporate team.


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