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15 March 2018

Government consultation on the proposed extension to entrepreneurs’ relief on a share sale

The government is consulting on an extension to the terms of Entrepreneurs’ Relief (ER). The aim of the proposed extension is to ensure that the legislation does not discourage entrepreneurs from seeking external finance for their companies. The consultation closing date is 15 May 2018.

When seeking to obtain ER on capital gains made in connection with the sale of shares in a company, the relevant selling shareholder needs to have (amongst other things) a shareholding of at least 5% of the company. The relevant conditions for ER on a share sale, all of which need to be met for the 12 months prior to the date of sale of the shares, are:

  • the claimant has held at least 5% of the company’s ordinary share capital;
  • the claimant has been able to exercise at least 5% of the voting rights in the company;
  • the claimant has been an employee of, or office holder in, the company, or in one or more companies which are members of the trading group; and
  • the company is a trading company, or the holding company of a trading group.

The government intends to introduce legislation in the Finance Bill 2018-2019 to allow individuals who no longer hold a 5% shareholding in a company to claim ER where the reduction in their percentage shareholding is a result of the company issuing shares to raise capital for the purposes of its trade. The new rules will apply to gains latent in shares and securities held at the time of fundraising events which take place on or after 6 April 2019. The government is consulting on the mechanism to achieve this relief. The government proposes that this is achieved through allowing the individual to preserve their entitlement to relief on the increase in value of their investment up to the time when their eligibility would otherwise be lost due to dilution, more specifically by:

  • a new facility that allows individuals to elect to be treated as having disposed of and reacquired their shares at the then-market value; and
  • allowing individuals to defer the taxation of this gain until an actual disposal of the shares.

It is proposed that the time at which the deemed disposal and re-acquisition are treated as taking place will be immediately before the issue of new shares by the company which results in one or both of the 5% shareholding and voting rights conditions ceasing to be met. Where a scheme or arrangement involves more than one issue of shares, it is proposed that the time will be immediately before the first issue which forms part of the scheme. To prevent abuse, it will be a condition for election that the issue of shares by the company is part of a commercial scheme or arrangement which has as its main purpose, or one of its main purposes, the obtaining of new capital as new consideration subscribed for the issue of new shares.

Under the current rules, in some circumstances, trustees of settlements may claim ER jointly with one or more qualifying beneficiaries of their settlements. Claims by trustees form only a small percentage by number and value of total ER claims. The government does not propose to extend this new elective disposal and re-acquisition facility to trustees.

See here for full details of the consultation. It is important to note that this remains a consultation on proposed legislation at present. It will be interesting to see how the consultation process shapes the proposed legislation and in what form it is ultimately passed (if indeed it is).

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