Government proposes changes to entrepreneurs tax relief

Government proposes changes to entrepreneurs tax relief

The government is planning to tweak the rules around entrepreneurs tax relief.

Entrepreneurs tax relief is a special rate of tax, set at 10 per cent, for individuals selling their shares in a private company.

In a consultation paper released alongside the Spring Statement yesterday (13 March), the government said it has noted many entrepreneurs miss out on the tax relief if they issue new shares in a company and doing so takes their total shareholding in the company below 5 per cent.

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A shareholding of less than 5 per cent does not qualify for the tax relief under the existing rules.

By issuing new shares, the investor is themselves not receiving a payment, the money raised by selling new shares to investors goes to the company.  

In the consultation paper the government said the present rules are a “perverse consequence” of a company becoming successful and wishing to issue more shares.

The consultation proposes that investors can trigger the tax relief immediately prior to their issuing of new shares, and defer the tax until a later date, when they sell some of their own shares.

Nimesh Shah, partner at accountancy firm Blick Rothenberg 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.”

He added: “While 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 per cent threshold, often beyond their control.”