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Consultation on allowing entrepreneurs’ relief for gains before dilution

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HM Treasury is consulting until 15 May 2018 on a new mechanism allowing individuals to retain entitlement to entrepreneurs’ relief in circumstances where their own shareholding becomes diluted below 5%. Responses to the ‘Financing growth in innovative firms’ consultation in August 2017 suggested the loss of entrepreneurs’ relief in this way may act as a barrier to growth for some firms.

The government announced its intention at Autumn Budget 2017 to include legislation in a forthcoming Finance Bill to allow individuals who no longer hold a 5% interest in a company to claim entrepreneurs’ relief, where the reduction in their percentage shareholding is due to that 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 consultation proposes to achieve this through:

  • 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.