The UK's entrepreneurs' relief (ER), which is already a valuable tax relief for individual UK-resident sellers of trading companies, is about to become a little more generous.

ER allows an individual employee-shareholder who has held at least 5% of ordinary shares and voting rights in a trading company (or in the holding company of a trading group) for at least 12 months prior to sale of his or her shares, to benefit from a lower (10%) rate of capital gains tax (CGT) on any gain made on the sale*.

Draft legislation published earlier this month confirmed that, from April 2019, an individual shareholder will still be able to benefit from the 10% ER rate of CGT in circumstances where his or her shareholding falls below the 5% threshold, provided that the dilution of the shareholding occurs as a result of the issue of new shares in the company for genuine commercial reasons (but not due to the exercise of share options or debt-to-equity conversions).

The rules are being relaxed so that capital-raising share issues do not unduly penalise those shareholders who would otherwise be able to benefit from ER.

As well as allowing the selling shareholder to elect to treat his/her shareholding as having been disposed of and immediately re-acquired at current market value prior to dilution (giving rise to a deemed gain on which ER can be claimed), the shareholder will also be able to elect to defer the deemed gain until such time as the shares are actually disposed of.

*The current top rate of CGT in the UK on share sales is 20%.