Entrepreneur’s Relief (ER) provides a 10% rate of capital gains tax (CGT) – half the main CGT rate – on lifetime gains of up to £10m for individuals selling qualifying business assets, for example, shares in their personal trading company.

At first sight, the extension of the qualifying period from one year to two years to support longer term business investment seemed relatively harmless and not unreasonable, given that most genuine entrepreneurs will own the business that they have founded or grown for at least a two-year period.

It is worth noting that this change applies to disposals on or after 6 April 2019 – which gives a small window of opportunity for anyone who currently meets the one-year qualifying holding period requirement but who will want to sell before they meet the new two-year qualifying period test. Advisers are already rolling up their sleeves in readiness for a flurry of business sales in the run up to the end of March 2019.

Of greater concern are the changes to the qualifying conditions set out in the Budget documents to ‘address an identified abuse of the current rules’.

The changes relate to the ‘personal company’ test, which must be met by individuals who want to claim ER on a share sale. For a company to qualify as a ‘personal company’ a shareholder now needs to hold 5% of ordinary share capital and voting rights and be beneficially entitled to 5% of available distributable profits and 5 per cent of the assets available for distribution on a winding-up.

Where a business has one share class, this may not sound complicated as one would assume that the entrepreneur would typically participate in dividends and net assets pro rata.

However, businesses often have multiple share classes. Where there is more than one share class, careful thought needs to be given to whether an individual is beneficially entitled to 5% of distributable profits. If the Articles of Association are silent on this point, or state that dividends are at the discretion of the board, is the condition met? Clarity from HMRC on this point is urgently needed.

The net asset test creates further complexity. This new provision will undoubtedly impact companies with certain types of share incentives, such as growth share plans or private equity type share structures with ratchets and ‘waterfall’ arrangements, where the net assets are not divided pro rata between shareholders.

For those that think there is an easy fix and rush to amend the company’s Articles of Association, a word of warning is needed. If the share rights are changed to grant fixed rights to dividends and net assets, this may well result in an increase in value of relevant shares and consequently an income tax charge under employment related securities legislation may arise. Arrangements specifically designed to secure ER may well also fall into the territory of the general anti-abuse rule (GAAR). Tax advice should be sought before acting.

For business owners with an exit on the horizon, it may now be worth considering whether a sale to an employee share ownership trust is feasible, an option which can deliver a zero rate of tax on sale.

In the meantime, for those with the luxury of time to plan ahead, it may be possible to implement share structures which do not fall foul of the new rules from the outset.

For those on the brink of a sale, urgent advice should be sought.