Entrepreneurs’ relief on diluted shareholdings

Key points

• Several changes were made to the entrepreneurs’ relief rules by FA 2019.
• A revised alternative ‘economic test’ can apply from 21 December 2018.
• Owners of ‘alphabet shares’ may gain from an alternative test that requires beneficial entitlement to at least 5% of sale proceeds.
• A preferential claim on sale proceeds may cast doubt on the entrepreneurs’ relief entitlement of other shareholders.
• Entrepreneurs’ relief can be crystallised if investment dilutes the shareholding to less than 5%.
• The tax on crystallised gains can be deferred until an eventual sale.

Finance Act 2019 brought in some additional conditions and changes to capital gains tax entrepreneurs’ relief. Looking through these changes it seems that they have been implemented to try to reflect the true nature of entrepreneurship and remove some barriers that previous rules created inadvertently. In the most part these changes appear more generous to genuine entrepreneurs – although I note the comments of Kevin Slevin...