ER extension on dilution of Shares will be welcome news for shareholders

Jemima Jones profile image

Jemima Jones, Partner

Jemima heads up the tax department for Heathrow and specialises in advising owner managed businesses and shareholders over a variety of sectors.

Nov. 22, 2017

As the Chancellor delivered the first Autumn Budget, we eagerly awaited what was in store – especially in the world of tax. However, there was one thing that went unnoticed: the helping hand offered to shareholders of trading companies.

It is very common for shareholders in a company to experience equity dilution if the company issues new shares (to new joiners, for example). This is because the proportion owned by existing shareholders goes down as more people come on board. This has various knock-on effects, including earnings per share and the market value of each individual’s shares.

But there is a wider problem. With the introduction of new shareholders, the existing shareholders’ relative stake in the company decreases. If a shareholder’s stake falls below 5% then they lose their entitlement to Entrepreneurs’ Relief on any capital gains when they decide to sell.

The Chancellor announced that from 6 April 2019, where shares become diluted through the appointment of new shareholders, the Government is willing to extend Entrepreneurs’ Relief. It means that if a shareholder has experienced dilution of shares such that they hold less than a 5% stake in a company, they will still be able to benefit from the 10% Entrepreneurs’ Relief tax rate on gains which accrued up to the point until their shareholding was reduced to below 5%.

This is particularly helpful where share options have been granted and are exercised prior to a sale event (excluding same day exercise and sale).  The exercise of share options dilutes other shareholders and those who are diluted below 5% could be faced with a tax liability which has doubled in size.

If you would like more information about how these announcements may affect you, or you would like to know more about shareholding or share schemes, contact Wilkins Kennedy for more information.

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