Important update – Entrepreneurs’ relief

On 29 October 2018 Chancellor Philip Hammond announced some important changes to entrepreneurs’ relief (“ER”). Below we have set out a high level summary of what ER is in relation to a disposal of shares, what has changed and the effect of these changes.


We recommend that any client who is planning to rely on ER gets in touch with us for a review of their structure.

What is ER?

ER is a relief used by individuals to reduce the Capital Gains Tax (CGT) they pay on the disposal of their shares. It operates by applying a rate of CGT of 10% (instead of 20%) provided certain conditions are met.

Before 29 October 2018 the conditions in relation to ER on a share sale by an individual were as follows:

  • the shares being sold had to be shares in a trading company or a holding company of a trading group;
  • the individual had to:
  • be an officer or employee of the company; and
  • hold at least 5% of the ordinary share capital (calculated by reference to nominal capital) which allowed him to exercise at least 5% of the voting rights.

These conditions all had to be satisfied for at least 12 months prior to the sale (this is known as the holding period).

Main Changes

On the 29 October 2018 it was announced that changes were being made to the conditions for ER. In relation to the sale of shares the main changes are as follows:-

  • from 6 April 2019 the holding period will increase to at least 2 years (currently it is 12 months as mentioned above); and
  • with effect from 29 October 2018 the shareholder now must hold shares which, as well as amounting to at least 5% of the ordinary share capital with at least 5% of the votes, must also be entitled to at least 5% of the distributable profits and 5% of the company’s assets available to shareholders on a winding up (“Economic Tests”).

Effect of these changes

This means that ER planning previously undertaken may no longer work.

In some cases it may mean that shareholders who you would expect to qualify (because on the face of it they have well over 5% of the ordinary shares) will no longer qualify for ER. For example, founders who have more than 5% of the ordinary share capital but do not have the right to 5% of the company’s assets on a winding up may not qualify.

It should be noted that the rules relating to the Economic Tests are extremely complicated. We therefore recommend that all companies (other than those with a single class of shares that all have the same nominal value and rights (including on a winding up)) undertake a review of their Articles of Association to establish which shareholders continue to qualify for ER after these changes and, where possible and if appropriate, take any necessary steps.

If you would like us to carry out an ER review or alternatively if you would like to find out any further changes which were made to the tax legislation please contact [email protected] or [email protected] and we would be delighted to assist.


This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of November 13, 2018.