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Claiming Entrepreneurs’ Relief On Shares (When You Don’t Own Enough)

by Thomas Nock Martin | May 25, 2020 | Tax

Claiming Entrepreneurs Relief

Summary. Claiming Entrepreneurs’ Relief (ER) on shares reduces Capital Gains Tax to 10% with a £1 million lifetime limit. Post-April 2019, if new issuances reduce your share ownership to under 5%, you risk losing Entrepreneurs’ Relief (ER), but making elections can preserve this right until you sell the shares.


Can I claim entrepreneur’s relief on shares?

Entrepreneurs’ relief (ER) applies to any material disposal of business assets. This includes shares and securities. Claiming entrepreneurs’ relief reduces the amount of Capital Gains Tax payable when you sell shares in all or part of your business.

If you qualify for entrepreneurs’ relief it results in a tax rate of 10% on the value of the sale. The number of claims is not capped. However, you can only claim up to £1 million of relief during your lifetime.

But how do you claim ER if you don’t have enough shares?

If you’re looking to raise capital for your company, but don’t have enough shares, you’ll need other shareholders to sell too. The issue is many people think that by doing so, they will miss out on entrepreneurs’ relief (ER). So what’s the solution?

Entrepreneurs’ relief restrictions

When claiming entrepreneurs relief, there are restrictions to bear in mind. In April 2019 new rules took effect in which you will lose ER if your shares are equivalent to less than 5% of the company’s total share issue because of a new share issue. However, to help resolve this issue you can make two elections to preserve your entitlement to ER and defer the resulting tax bill until you sell your shares.

For example: A company has twenty shareholders, who each own between 5% and 15% of the shares available. Mr Smith owns 5% which means he has proportionate voting rights on company. The company needs to raise more capital. So it decides to sell more shares to current shareholders however; Mr Smith can’t afford to buy more shares. This means his current share percentage will be diluted to less than 5%. He will now no longer qualify for entrepreneur’s relief (ER).

The solution?

Persons whose shareholding is diluted below the 5% bracket as a result of a new share issue on or after 6 April 2019 can make an election to preserve their right to ER. However, conditions apply that state this is only for the period up to the date on which the new shares were issued.

Any capital gains made after the date on which new shares were issued does not qualify for ER unless, said person buys more shares which meet the qualifying 5%. However, be prepared that if you make the election you might trigger a CGT bill.

Call Thomas Nock Martin today

Whatever your scenario is, be sure to talk to an accountant about the various tax options available to you. If you are claiming entrepreneur’s relief you have to do so in the 31 January tax return submission, for the year following the disposal of your shares.

As leading Chartered Accountants in Brierley Hill, Thomas Nock Martin can help you with any business tax support. Get in touch today and speak with a member of our expert team.