Tax changes announced in Budget 2015 may well cause many management teams to lose tax relief on their existing shareholdings. Management teams who club together to hold their equity via a separate management 'feeder' company will be affected by this change. This approach is popular with many private equity investors because it pools management in a single vehicle and reduces the number of minority shareholders.
It also means that UK management can hold shares in a UK company, as opposed to having shares in overseas holding companies, which many managers will prefer, and is usually simpler. In recent years, such structures have had the benefit of enabling managers who hold 5% of the shares in the feeder company to claim entrepreneurs' relief on sale giving a 10% tax rate on an eventual exit.
This is because the current 'joint venture' rules treat the feeder company as trading, on the basis that it has a qualifying stake in the underlying trading company. This treatment is removed with immediate effect. The shareholding will no longer be treated as being in a trading company so no entrepreneurs' relief will be available.
Management teams who have invested via such structures will now pay tax at 28% on any gains, rather than the expected 10%. The usual rule which provides a grace period for entrepreneurs' relief for three years after a company has ceased trading has been removed in these circumstances. Companies that have been affected by these changes will need to urgently review their shareholding structures and incentive arrangements.
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