Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

ER guidance

25 July 2018
Issue: 4657 / Categories: For Action , Capital Gains

Advice on avoiding the entrepreneurs’ relief trap from Tolley Guidance.

On 6 July 2018, draft legislation was published for inclusion in Finance Bill 2019 to allow investors to retain a measure of capital gains tax entrepreneurs’ relief when the issue of shares to other investors causes their own shareholding to fall below 5% 

– the minimum holding that qualifies for relief. At the moment, such a share issue would remove entitlement to relief completely, even for the period when the qualification conditions were met. From April 2019 this will change. Relief will be preserved until the date of the share dilution.

This is achieved by allowing an individual to treat a gain as arising immediately before the share issue, based on the market value of the shares at that date. This gain will qualify for entrepreneurs’ relief. The gain from the date of dilution to the ultimate sale of shares will be chargeable at normal capital gains tax rates without the benefit of the relief.

In itself, this gives only partly resolves the problem because the deemed gain gives rise to a ‘dry’ charge – in other words, no cash is available to pay the tax. To avoid this, it will also be possible to delay the time that the gain is taxed until the ultimate sale of shares. Again, this is not compulsory but it is hard to think of reasons why one would not do this.

The essentials

Important points relating to this change are:

  • It applies only when the shares that cause the dilution are subscribed for in cash.
  • The subscription must take place on or after 6 April 2019.
  • Relief will not be available if tax avoidance is involved.
  • The valuation of the shares immediately before the subscription can be based on the value of the whole company. It is not necessary to apply the discounts normally required in valuing minority interests.
  • The relief is not automatic and must be claimed. The time limit for the election to crystallise the gain at the point of dilution is 31 January in the year after the year of disposal. For the election to defer the gain becoming chargeable until the ultimate sale of the shares the limit is four years from the end of the tax year in which the dilution occurred.

Practical implications

This is a welcome change. Although it will affect few people, it will be of real benefit to those who have faced the choice between attracting additional funding at the cost of a loss of tax relief or not raising the funding so that they can retain the benefits of the relief. The ability to use an undiluted valuation basis in computing the notional gain is a welcome change from the original proposals. Without it, the gain on which entrepreneurs’ relief was due would, in many cases, have been so small in many cases that the relief would have had negligible financial benefit.

The immediate action point for advisers is to ensure that the timing of any new share issue is managed. If it is commercially possible to delay the issue of new shares until 6 April 2019 this will enable shareholders to access the new regime. Of course, this may not be possible commercially but, at the very least, the relevance of the timing of any share issue should be discussed with clients.

The longer-term action point will be that advisers will need a system to monitor the time limits for making the two different elections. They are fairly generous, but it would be all too easy to overlook them. Entrepreneurs’ relief is one of the most valuable reliefs and, if the inaction of an adviser deprived the client of potential relief, serious professional indemnity consequences could well follow. l



  • TolleyGuidance. Find solutions quickly, understand how to apply them and avoid undue risks. Our online platform combines tax technical commentary with practical guidance, so you can confidently deal with your clients’ needs. For more information visit:
    This extract from Tolley Guidance was written by Andrew Hubbard.
  • HMRC policy paper – Entrepreneurs’ Relief Where Shareholding ‘Diluted’ Below the 5% Threshold:


Issue: 4657 / Categories: For Action , Capital Gains
back to top icon