He said: “The proposal is greatly welcomed and looks to protect the interests of entrepreneurs and founders of businesses, and further enhances this valuable relief in the UK’s personal tax regime.”
“Whilst a consultation process is sensible, to ensure that the election mechanism is introduced correctly, in this instance, the Government could have been bolder to introduce the new rule with immediate effect. The proposal makes complete sense and has been a longstanding issue for shareholders who find their interest fall below the 5% threshold, often beyond their control.”
Following today’s Spring Statement, the Government published a consultation in relation to the operation of entrepreneurs’ relief. Entrepreneurs’ relief is the 10% rate of capital gains tax which applies to certain disposals of interests in businesses.
The Government identified an issue with the current entrepreneurs’ relief rules which can impact shareholders of companies, where the business raises external investment and a shareholder’s interest is diluted below the 5% threshold for them to benefit from entrepreneurs’ relief on a future sale.
The consultation proposes a mechanism for a shareholder to elect to crystallise entrepreneurs’ relief, just before the business raises investment and their shareholding drops below 5%. The shareholder can then choose to pay the tax (with entrepreneurs’ relief applying) or defer the tax until their shares are eventually sold. In most cases, it is expected that the shareholder would defer the tax.
In the consultation document, the Government comments that the loss of entrepreneurs’ relief as a result of the business taking on investment is a ‘perverse consequence of the growth and success of the company’, and can occasionally act as disincentive for seeking additional finance in order to grow the business. The proposal in the consultation looks to address these issues.
Shah added: “The current proposal is that only the gain up to the point the person makes the election will qualify for entrepreneurs’ relief, and the future increase in value will be taxed at the normal capital gains tax rate, which is currently 20%. There is an argument that the entire gain should qualify for entrepreneurs’ relief, and hopefully this important point will be considered carefully as part of the consultation process.”