As it stands, if an entrepreneur’s shareholding falls below 5 percent after they issue new shares in their business, they are unable to avail themselves of Entrepreneurs Relief. This has long been a bugbear of hundreds of successful people who have felt they are being penalised for their business’s success.
Now, alongside the Spring Statement, the government has released a consultation paper outlining plans to right this wrong.
Entrepreneurs currently pay a special capital gain tax rate of just 10 percent when they sell shares in their business. However, this doesn’t apply if their equity falls below 5 percent after fundraising and issuing new shares.
The government proposes that individuals be allowed to elect to be treated as having disposed of and reacquired their shares at the then-market value. They should then be allowed to defer the taxation of this gain until their shares are actually sold.
The consultation paper, snappily entitled: ‘Financing growth in innovative firms: allowing Entrepreneurs’ Relief on gains before dilution’ argues that the changes are intended to prevent business owners from being disincentivised from seeking external financing for their business.
The government explains “ER was introduced to incentivise and reward entrepreneurs who, with significant initiative and risk, play a key role in building and growing a business.” It says that, in some circumstances, the loss of the incentive could actually result in an entrepreneur opting against growing his or her company.
“Such an outcome conflicts with the intended purpose of ER, and the government therefore believes it is right to act now to remove this barrier in a fair and proportionate way,” the government added.
It’s fair to say that the consultation paper has been welcomed by the entrepreneurial community, although some have argued that a consultation wasn’t even necessary as the policy isn’t likely to attract much criticism.
Nimesh Shah, partner at accountancy firm Blick Rothenberg, told the Financial Times: “The proposal makes complete sense and has been a longstanding issue for “shareholders who find their interest fall below the 5 percent threshold, often beyond their control.”