During the last Budget, the Government announced new conditions to entrepreneurs’ relief that would take immediate effect to change the definition of a “personal company” for shareholders who claim entrepreneurs’ relief.
By introducing these changes, they hope to restrict shareholders relief to those with a genuine material stake of at least five per cent in a company.
For gains arising from shares, or assets used by the company, the company has to be their “personal company”, which requires them to be an employee or officer of that business or one within the same trading group.
In order to obtain relief shareholders would, therefore, have to meet four conditions:

• hold five per cent of the ordinary share capital
• control five per cent of the voting rights
• have a right to at least five per cent interest in the distributable profits
• have a right to at least five per cent of the net assets on a winding-up of the company.

However, the last two points are proving difficult to codify into law, due to the fact that they appear to rely on provisions relating to companies, intended to prevent the abuse of corporation tax group relief.
This has resulted in the tests referring back to definitions of a company receiving a distribution from another company, rather than looking at this issue at an individual shareholder level.
The point regarding distributable profits also creates issues as such entitlement, usually in the form of dividends, is not given until a dividend resolution is passed by all the eligible shareholders.
Following these issues, HMRC has tabled an amendment that will create an alternative test for a “personal company” based on the shareholder’s entitlement to proceeds in the event of a hypothetical sale of the whole company.
This will ensure that it will be easier to estimate the value of the whole company on a single day, rather than changing shareholder’s rights and dividend entitlements over the entire qualifying period.