HMRC has published ‘Allowing Entrepreneurs’ Relief on gains before dilution: consultation response’ alongside draft legislation which will ensure shareholders retain ER when a company ceases to be a personal company due to a fundraise.

The publication of the response follows the consultation, ‘Financing growth in innovative firms: along Entrepreneurs’ Relief on gains made before dilution’.

The consultation aimed to protect shareholders from a loss of Entrepreneurs' Relief (ER) due to a fundraising activity which resulted in their holding dropping below 5%. The government were concerned that this loss of ER was acting as a barrier to growth.

As a solution, they suggested a taxpayer could elect to treat themselves as making a deemed disposal and reacquisition immediately before the finance raise and claim ER. They would also be able to defer the gain.

  • Many respondents believed it was not a barrier to growth. Whilst shareholders may be concerned about the loss of ER, the company would not be and it would not normally impact financing decisions.
  • There were a number of respondents who felt that the cost of a valuation required so that the shareholder can calculate the deemed disposal might outweigh the benefit.
  • Others pointed out that the valuation would require a significant discounting factor due to the minority holding, which would mean the benefit is greatly reduced when there is a final sale of the whole company in the future.

HMRC will introduce the changes to take effect for dilutions occurring on or after 6 April 2019. Draft legislation has been included in the draft Finance Bill 2018-19:

  • It will apply when the company ceases to be a personal company for the individual due to a relevant share issue. This will apply where the share issue results in the shareholder's percentage holding dropping to below 5% (or less than 5% of votes).
  • The individual must have been eligible for ER if he had disposed of the shares immediately before the finance raise.
  • Where the conditions are met he can elect to be treated as if making a sale and reacquisition immediately before the finance raise at relevant value.
  • In light of the responses, relevant value will be the appropriate percentage of the market value of the entire company shareholding and there will be no requirement to include minority discounts.
  • The shareholder can also elect for the gain to be deferred until some future disposal.

Comments on the draft legislation are invited by 31 August 2018. The full response document can be found here and the draft Finance Bill here.


Entrepreneurs' Relief

Allowing Entrepreneurs' Relief on gains before dilution: consultation


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