Policy paper

Entrepreneurs’ Relief where shareholding ‘diluted’ below the 5% threshold

Published 6 July 2018

Who is likely to be affected

Individuals who hold shares in a trading company that qualify for entrepreneurs’ relief.

General description of the measure

This measure allows individuals whose shareholding is ‘diluted’ below the 5% qualifying threshold for entrepreneurs’ relief as a result of a new share issue to obtain relief for gains up to that time.

Policy objective

The measure ensures that entrepreneurs are not discouraged from seeking external investment to finance business growth in circumstances where their own shareholding becomes diluted.

This is part of the government’s response to the patient capital review, and is in line with the government’s policy of supporting enterprise and entrepreneurship.

Background to the measure

At Autumn Budget 2017 the government announced that changes would be made to entrepreneurs’ relief to remove the disincentive to accept external investment, and announced a consultation on the detailed implementation of that change.

A consultation entitled ‘Financing growth in innovative firms: allowing entrepreneurs’ relief on gains before dilution’ ran from 13 March 2018 to 15 May 2018, and the government’s response, along with draft legislation, was published on 6 July 2018.

Detailed proposal

Operative date

The measure will have effect for shares held at the time of fundraising events which take place on or after 6 April 2019.

Current law

Current law is included in chapter 3 of part 5 of the Taxation of Chargeable Gains Act (TCGA) 1992.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19 to introduce a new Chapter 3A into Part 5 of TCGA, which will allow individuals to make two elections providing the relevant conditions are met.

The new section 169SC will allow an election where a company has issued shares for cash consideration for genuine commercial purposes, which has caused the individual’s shareholding to fall below the 5% threshold required to meet the ‘personal company’ definition in section 169S, in the circumstances where a disposal of the shareholding prior to the issue would result in a gain which would qualify for entrepreneurs’ relief.

The election will treat the individual’s holding of (or interests in) shares or securities in a company as having been disposed of and immediately reacquired at market value prior to dilution, giving rise to a chargeable gain on which they can claim entrepreneurs’ relief.

The second election in new section 169SD will be to defer the gain until an actual disposal of (or if interests in) the shares or securities. The legislation will then specify how deferred gains are treated as accruing on part disposals and in other specific circumstances.

In addition the legislation will specify rules in relation to making the above elections and claiming entrepreneurs’ relief on the deferred gain.

Summary of impacts

Exchequer impact (£m)

2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023
- - nil -10 -10 -10

These figures relate to the ‘Entrepreneurs’ Relief: anti-dilution’ element of the ‘Patient Capital Review: reforms to tax reliefs to support productive investment’ package set out on page 17 of the policy costings document published alongside Autumn Budget 2017 and were certified by the Office for Budget Responsibility.

2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023
- - +45 +35 -15 -20

These figures are set out in Table 2.1 of Autumn Budget 2017 as ‘Patient Capital Review: reforms to tax reliefs to support productive investment’ and were certified by the Office for Budget Responsibility.

They represent the combined Exchequer impact of ‘Reforms to the Venture Capital Schemes’ and ‘Entrepreneurs’ Relief: anti-dilution provision’. More details can be found in the policy costings document published alongside Autumn Budget 2017.

Economic impact

This measure is not expected to have a significant macroeconomic impacts.

This measure also accounts for two behavioural responses. The lower entrepreneur’s relief rate provides an incentive for taxpayers who newly qualify for entrepreneur’s relief to dispose of their assets sooner and, conversely, taxpayers who currently dispose of their assets in anticipation of dilution in order to qualify for entrepreneur’s relief no longer need to do so, and may hold their assets for longer.

Impact on individuals, households and families

One-off costs include familiarisation with new rules, potential share valuation costs (which may be significant), and making an election and deferral claim at the time their shareholding is diluted.

Customers wishing to take advantage of this measure will need to record and track any deferred gains until they accrue, so ongoing costs include recording deferred gains, and maintaining records to ensure those gains are notified to HMRC when they are treated as accruing.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts on groups with protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a positive impact on a small number of (mostly small and medium-sized) companies raising money by issuing new shares. The impact on administrative burdens is expected to be negligible.

One-off costs include familiarisation with new rules when a company considers issuing new shares (the individual shareholder will make the election).

It is not expected there will be any on-going costs on the basis that it is the shareholder who will need to report accrual of the gain and claim relief.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be no significant operational impact on HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from tax returns and receipts.

Further advice

If you have any questions about this change, please contact Leah White on Telephone: 03000 530 279 or email leah.white@hmrc.gsi.gov.uk.