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TAX TIP TUESDAY: Update on Alphabet Shares Due to Entrepreneurs’ Relief

Our 5-minute read – Tax Tips – for UK doctors and dentists will help you save tax, get organised with your tax affairs and make sure you meet important deadlines with ease.

This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. The Financial Conduct Authority does not regulate tax advice. 

Discussions regarding the reclassification of what constitutes a “personal company” under Entrepreneurs’ Relief have recently taken a turn for the better. Originally, the new rules that were being drafted towards the end of last year would have required claimants to not only possess at least 5% of the ordinary share capital and voting rights within their company but also be entitled to at least 5% of both the profits and assets available for distribution.

The issue with this stipulation has to do with alphabet shares (companies structure their shares as A, B, C, etc.), which do not differentiate in rank. Historically, this structure has enabled companies to be flexible with profit distributions, but has also muddied the waters in terms of clarifying the percentage of profits available, thus making it difficult to determine exactly how much a shareholder is entitled to.

What’s new?

The newly revised provisions now state that a company qualifies as a “personal company” if you hold at least 5% of the ordinary share capital and retain at least 5% of the company’s voting rights. This portion of the amendment is non-negotiable, but you must also meet one of two alternative tests.

  • The first test, which is arguably still problematic for alphabet shareholders, is that you are entitled to at least 5% of the profits available for distribution.
  • The second test is that, in the event that the share capital of the company were to be sold for market value, you would be entitled to 5% of the revenue.

This second test is more appealing to those companies who use the alphabet share structure, especially the common “quasi partnership” scenario. In this set-up, lawful co-owners take advantage of alphabet shares to allocate profits flexibly year to year with no impact on company equity.

Are there any other considerations?

Other situations may still require a closer inspection, most notably companies that employ share flowering or venture capital investment. But, on the whole, the amendments do appear to take into consideration the issues that were raised during initial discussions, so things are certainly looking up.

If you have any questions about how these rules could affect your business, get in touch with us today. We’ll be happy to advise on the best plan for your company.

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