A consultation on Entrepreneurs’ Relief to ensure it does not discourage entrepreneurs from seeking external finance for their companies.
The Government has published a consultation document setting out proposals which are intended to allow access to Entrepreneurs’ Relief (ER) where there is a dilution below the normal 5 percent qualifying level as a result of funds raised for commercial purposes by means of an issue of new shares. At present, entitlement to the special ER 10 percent rate of capital gains tax may be lost on the issue of new shares if an individual’s personal shareholding falls below 5 percent. The Government’s proposal is to allow an individual to benefit from the ER to which they are entitled before dilution. The proposed mechanism is to allow an election to crystallise the capital gains that would be realised if there was a market value disposal immediately before dilution. The individual can then choose to defer paying the tax on this gain until the actual disposal of the shares.
These proposals follow an announcement in Budget 2017 that changes would be made to ER to ensure that entrepreneurs are not discouraged from seeking external investment to finance business growth in circumstances where their own shareholding becomes diluted. In response to the Government’s ‘Financing growth in innovative firms’ consultation, some have expressed concerns that the current 5 percent minimum shareholding requirement for ER is causing individuals to exit their company early to retain the relief, as opposed to continuing to support and grow the business after fundraising.
The purpose of the consultation is to set out and invite comments on the Government’s proposed mechanism to allow ER to continue in these circumstances.
Whilst the aim of removing the current tax disincentive to raising external finance to grow an entrepreneurial business is welcome, it is disappointing that the proposals do not seek to incentivise the future growth of the business. It is also disappointing that due to perceived complexity, the current proposals do not extend to trustees.
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