The change for Entrepreneurs relief was announced amongst the draft clauses for the Financial Bill and was confirmed during the Autumn Budget 2018.
Taxpayers may be able to bank Entrepreneur’s Relief.
From 6 April 2019, if the shareholder’s entitlement falls below that of the 5% qualifying threshold required for Entrepreneurs’ Relief due to the company issuing more shares for cash, they should be able to take advantage of this new provision. There is of course the prerequisite that the share issue has not occurred for tax avoidance purposes. This provision will also not be available if the percentage entitlement falls due to a part disposal of shares.
In order to benefit
Under this new provision, the qualifying taxpayer will be required to make an election to deem that a disposal of their shareholding has taken place immediately before the dilution of their holding. This crystallises a gain at that point, however as there are no proceeds they would then make a second election, which will have the effect of postponing the deemed gain until the actual disposal of the shares.
Two gains calculations
Once the final disposal is completed, two gains calculations will need to be carried out.
Firstly a calculation will be done for the deemed gain up until the point of dilution with a claim for Entrepreneurs’ Relief and then the second calculation will take into account the final sales proceeds and using the market value of the shares at dilution for the base cost, but with no Entrepreneurs’ Relief.
It will therefore be necessary to value the company at the date of dilution, and it is highly likely that there will be highly strict deadlines for making the elections, thus if you think you may be involved in this type of situation it would be best to speak to your tax advisor as soon as is possible.
Richard Godmon is a Tax Partner at Menzies LLP – to discuss how the updates to Entrepreneurs relief might impact your business, contact him by phone on +44 (0)1489 566709 via email at RGodmon@menzies.co.uk.