Relaxation of Entrepreneurs’ Relief on Dilution of Holdings
Relaxation of Entrepreneurs’ Relief on dilution of holdings
In Spring 2018, the Government published a consultation on the details of its proposal to relax the qualifying conditions of Entrepreneurs’ Relief (“ER”) in specific circumstances and they have now published draft legislation on the matter which is to be included in the Finance Bill 2018-19, potentially giving effect from 6 April 2019.
Where an individual’s interest in a company is reduced below the normal 5% qualifying level as a result of the company raising funds for commercial purposes by means of issuing new shares, the legislation will provide for that individual to be able to elect to be treated as having disposed of and reacquired their shares immediately prior to the dilution event, triggering a gain on any increase in value up to that point, on which ER would be available.
The draft legislation also includes a second election which will allow for the individual to defer this gain until a time when the shares in the company are actually sold.
In respect of these elections, the government will allow individuals to value their shares on the assumption of a whole company sale, as opposed to applying a minority discount, in order to ensure equal treatment between minority and non-minority shareholders.