QCA Response to HM Treasury - Financing growth in innovative firms: allowing Entrepreneurs' Relief on gains before dilution 

15th May 2018

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15th May 2018 - Our Tax and Share Schemes Expert Groups contributed to our response to HM Treasury's consultation on allowing Entrepreneurs' Relief on gains before dilution.

Our Tax and Share Schemes Expert Groups contributed to our response to HM Treasury's consultation on allowing Entrepreneur's Relief on gains before dilution.

Although we welcomed the government's decision to consult on Entrepreneurs' Relief gains, we commented that the proposals outlined did not go far enough in incentivising and rewarding entrepreneurs who, with significant initiative and risk, play a key role in building and growing a business.

In particular, we remarked that although the proposals would only allow individuals to benefit from Entrepreneurs’ Relief on gains up to the point at which they are diluted below 5%. Yet a significant proportion of the growth in a company’s value could take place following this dilution. We emphasised that if the individual has contributed to the growth of the company, then they should also be able to benefit from the reduced 10% rate in respect of the future gain. The loss of the 10% rate to a significant proportion of any ultimate gain will still act as a barrier to growth for some firm.

Furthermore, we noted that properly advised taxpayers would in most circumstances, where a taxpayer will be diluted below 5% following an investment, make the election to crystallise the gains made prior to dilution, particularly where there have already been significant gains made on the shares. However, this could disadvantage taxpayers who were not able to afford professional tax advice, as they would unlikely be unaware of the need to make an election.

We recommended the implementation of a fairer and simpler system: allowing taxpayers to qualify for Entrepreneurs’ Relief if they satisfy the 5% shareholding condition for 12 months at any time in the previous six years.

Click here to download our response (pdf).

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