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Proposed tax changes for entrepreneurs and VC investors

Posted on 12 April 2018

Proposed tax changes for entrepreneurs and VC investors

Two noteworthy proposals in relation to growth companies emerged in the Spring Statement. 

Entrepreneurs' relief

HMRC is consulting on a proposal to preserve entrepreneurs' relief (ER)  for shareholders who, before a bona fide fund raising, qualify but do not afterwards.

Essentially, any gain that had accrued immediately before the fundraising would be computed as if the shares were sold ("ER frozen gain"). That would qualify for ER. Post dilution growth in value would not. A taxpayer could elect to defer the ER frozen gain until an actual disposal of the shares: he or she could then pay tax on the ER frozen gain and on the gain on the shares since dilution. If there was a part disposal, only part of the ER frozen gain would crystallise. If, after the fundraising the shares had fallen in value, any loss could be carried back to reduce the ER frozen gain.

Companies likely to dilute shareholders who currently benefit from ER may want to defer further fundraising rounds until any resulting legislation is in place.

Enterprise Investment Scheme funds

HMRC is considering whether to grant Enterprise Investment Scheme (EIS) like relief on subscriptions into funds owning "Knowledge Intensive" (KI)" companies. The government's Patient Capital review suggests that VCTs fund later stage investments in companies but tax advantaged funds might finance earlier stage growth in KI companies.

The relief would be based on the EIS (which requires ordinary shares and three years ownership to secure/retain relief) but probably require 80-90% of funds to be invested in at least four KI companies. HMRC is considering what incentives to offer (for example, no tax on dividends received after five to seven years from investment and whether taxpayers, realising an otherwise taxable gain, who reinvested in the KI fund could have a proportion of their gain written off). HMRC is also interested in how to balance investors' desire for certainty over the tax relief and yet not encourage funds to rush to invest, perhaps in too small amounts to make a difference to the KI companies selected.

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