HMRC has published a consultation, ‘Financing growth in innovative firms: allowing Entrepreneurs’ Relief on gains made before dilution’, which looks to protect ER claims for shareholders whose holding is diluted due to fundraising.

  • Under current rules, where a shareholder’s holding in a company is reduced to below 5% due to a fundraising event, Entrepreneurs’ Relief (ER) may be lost for future disposals.
  • Following an earlier consultation on ‘Financing Growth in Innovative firms’, the Responses indicated that the loss of ER after shareholdings are diluted without selling shares, due to fundraising, discourages growth.
  • In response, the Treasury has published its latest consultation on proposed changes to the law.


The proposals aim to ensure that individuals who no longer hold a 5% interest in a company due to a reduction caused by the company issuing shares to raise capital for its trade, will still be entitled to claim Entrepreneurs’ Relief.

The new rules would apply where there is a fundraising event after 6 April 2019, which otherwise cause this effect.

Election for deemed disposal

  • Individuals will be able to elect to crystallise gains on the shares immediately before their holding is diluted.
  • The individual will be treated as selling and reacquiring the shares at market value.
  • The election will only be possible if the individual meets the conditions for ER.
  • The election will only be possible if the dilution of the individual’s shareholding is in consequence of an issue of shares by the company for genuine commercial reasons.
  • The election will be made in the Tax Return and the normal self-assessment time limits will apply.

Deferral of gain

  • In appreciation of the fact that some individuals will not be able to pay the ‘dry’ tax charge on a deemed sale and reacquisition caused by the election, it will be possible to defer the gain until a future actual disposal.
  • Where the claim is made the ER on the deferred gain is preserved so that ER can be claimed under the rules in place at the time of future disposal.
  • If the gain is deferred, any disposal made at below the deemed disposal and reacquisition market value will create a capital loss which can be offset against the deferred gain.
  • If the gain is not deferred, any loss for a future disposal below the deemed disposal and reacquisition value cannot be set against the original gain on which ER was claimed.
  • The normal claim limit of 5 years following the end of the tax year in which the deemed disposal takes place applies.

The election and deferral options will not be extended to Trustees and will not affect associated disposals.

Revived deferred gains

  • Where part of the shares subject to a deferred gain are sold, that proportion of the deferred gain will crystallise.
  • Complications will arise where further shares are acquired after the dilution and deferral, as these will be pooled with the shares subject to deferral.
  • The current proposal is that the shares on which the gain was deferred will be treated as disposed of first on a future sale.


Individual A deferred a gain of £50,000 on 20,000 shares in 2023/24. A acquires a further 5,000 £1 ordinary shares in 2027, bringing their total holding to 25,000 shares which are ‘pooled’ for CGT purposes. They sell 10,000 shares in 2029. The amount of deferred gain which is treated as accruing on this sale would be £25,000 (= £50,000*(10,000/20,000)) and not £20,000 (= £50,000* (10,000/25,000)).

The consultation will run until 15 May 2018 and the full document can be read here.


HM Treasury has published the response ‘Allowing Entrepreneurs’ Relief on gains before dilution: consultation response’ alongside draft legislation.



Entrepreneurs’ Relief

Summary of questions 

1 Will this elective disposal and reacquisition approach help to remove the potential barrier to growth of losing entitlement to ER?

2 How frequently do you think these new facilities would be used?

3 Do you envisage taxpayers electing for deemed disposal and reacquisition but not claiming deferral of their gain?

4 Are there circumstances in which electing to be treated as having disposed of Shares, or allowing an individual to defer the gain would not remove the obstacle to refinancing?

5 Are trustees a significant constituency amongst investors who lose entitlement to ER on dilution?

6 Do you foresee challenges around keeping track of deferred gains so as to ensure they are correctly notified to HMRC when they are treated as accruing?

7 Do you agree that accrual of the deferred gain should be linked to a disposal of shares or securities equal in number to those in respect of which the crystallised gain was computed?

8 Do companies which raise capital by means of issuing new shares commonly use assets owned privately by their shareholders? Will the effect of these proposals be significantly reduced by excluding private assets from their scope?

9 Do you agree that this should be the time of the deemed disposal and reacquisition?

10 Will this ‘commercial capital-raising’ condition allow elections in all legitimate circumstances? What other conditions might be necessary in order to prevent abuse?

11 Do you have any comments on the assessments of equality and other impacts in the summary of impacts table?