By Clare Munro, senior tax partner
0207 490 7766
The Spring Statement was never intended to be a mini-Budget so it was no surprise to us that it didn't produce any immediate tax changes. Instead it launched a series of consultations, and some could have important consequences for business owners.
One affects the key relief from capital gains tax for entrepreneurs. This relief brings the capital gains tax rate for entrepreneurs who sell a business or shares in their company down from 20% to 10%. In my experience most business clients know about the relief and assume that it will be available when they sell up. In fact there are multiple traps built into the rules which make it perfectly possible to lose the relief accidentally
Recent cases going through the courts have demonstrated this effect. In the most recent; a loan was capitalised into redeemable non-voting shares when the company founders applied for a government grant. The new shares were found to have diluted the founders' holdings below the key threshold of 5%, denying them relief.
The government has taken on board the fact that this could be seen as a disincentive to expansion. Faced with a potential loss of this vital relief, founders might well hold back from sourcing additional finance and allow their company to stagnate. As part of the Spring Statement, chancellor Philip Hammond announced that from April 2019, if a fundraise involves a share issue that dilutes existing holders below 5%, then the shareholder will be able to make an election to crystallise the gain at that point and use the entrepreneurs' relief entitlement. There will also be an option to postpone the tax charge until the shares are actually sold.
In reality, many who start up a small company will sell long before their holding is diluted below 5%, so it’s not a problem that we frequently encounter in practice. However, it's certainly true that, for founders with big growth plans, perhaps involving a dilution of their shareholding with a private equity injection, they could miss out on a relief which was intended to incentivise them to start up and grow their companies.
The consultation is asking for responses on the mechanism for implementing this relaxation and it will not take effect until 2019. However, given the importance of small and growing businesses to our economy, it is a welcome move from the government to direct the benefits of Entrepreneurs’ Relief to the right people.
This article can also be viewed via the London Business Matters website here.