How will the changes to Entrepreneurs’ Relief affect you?
The government are seeking to make changes to Entrepreneurs’ Relief. This is to ensure that entrepreneurs are encouraged to seek external investment opportunity to finance business growth, which may result in shareholdings being diluted.
Entrepreneurs’ Relief (ER) can be extremely valuable when selling an investment in a business. It can provide a 10% Capital Gains Tax rate on gains arising on qualifying disposals of shares. The main higher rate is 20%.
However, there are circumstances when you can lose eligibility for ER. For example, if a company goes through fundraising efforts that results in an individual’s shareholding being diluted below 5%. The government recognised that this outcome conflicts with the original objective of ER. The objective was to promote enterprise by offering a reduced tax rate to those who contribute, often with high risk.
The proposed changes to Entrepreneur’s Relief will take effect when:
- A company has issued shares as part of a fundraising exercise, and;
- This results in an individual’s shareholding being reduced below the 5% threshold required to qualify for ER.
If this applies, the individual can make an election to treat their shares in the company as having been disposed of and immediately reacquired at market value prior to the dilution. This will create an ER claim on the gain. A second election will also be available to defer the gain until an actual disposal occurs, as no cash has been realised on this transaction.
This means that the gain arising prior to the dilution (which would have qualified for ER) can be banked, with only the gain arising after dilution not qualifying for this relief.
It is proposed that the introduction of this legislation for fundraising transactions will take place on or after 6 April 2019. Individuals will need to make a positive decision to apply these elections. We expect disclosure will be made on their Self-Assessment Tax Returns to ensure this is properly recorded.
A share valuation will also need to be prepared for this disclosure. This should align with the investment made.
The information provided is a very brief overview of what can be a complex area. If you have any questions about the changes to Entrepreneurs’ Relief, please contact us on 01903 234094.