On 6 July 2018, HMRC published draft legislation for the Finance Bill 2019, including the anticipated extension to the parameters of entrepreneurs' relief announced at Autumn Budget 2017.
The aim of the proposed legislation is to ensure that entrepreneurs are not discouraged from seeking external investment to finance business growth in circumstances where their own shareholding becomes diluted. Under the current rules, entrepreneurs' relief is available where an individual holds 5% of the ordinary shares in a company, enabling the individual to benefit from a reduced rate of tax (10%, rather than 20%) on any gain arising on the sale of those shares. (Other conditions must also be met.)
The new rules introduce two elections:
- Where a company has issued shares for cash consideration for genuine commercial purposes and the individual's shareholding has fallen below the 5% threshold, an election can be made to treat the shares as having been disposed of and immediately reacquired at market value prior to the dilution event. Entrepreneurs' relief can then be claimed on any gain arising (subject to meeting the other requirements of the relief).
- The second election allows an individual to defer the gain (on the deemed disposal referred to above) until an actual disposal of the shares. However, entrepreneurs' relief is not automatic so must be claimed, and all the other requirements must be met at the date of the later, actual disposal of shares. There is, therefore, a risk that entrepreneurs' relief may not be available on a future disposal due to one of the other conditions not being satisfied.
The changes will have effect from 6 April 2019.