Entrepreneurs’ Relief – Take care of over dilution

BLOG21st Oct 2019

Prior to the 2018 budgetif an individual’s shareholding was diluted due to an issue of new shares by the company on the same day that individual disposed of their shares, this could be ignored when considering whether the Entrepreneurs’ Relief (ER) conditions were met 

Therefore, when considering the availability of ER on the sale of shares, their shareholding was calculated immediately before this “same day” dilution.  If the individual previously met the 5% personal company shareholding test prior to the dilution but not after the dilution, ER would still be available on the disposal.  

This can often happen where employees hold share options which are not capable of exercise until the sale of the company.  

Following the changes to ER introduced in 2018, HMRC’s opinion has now changed. They will consider the individuals position at the time their shares are sold, i.e. after the dilution, and if individual is diluted below the 5%, even if this is a same day dilution, then ER will not be available 

However, a relief was also introduced in the 2018 budget which allows an individual to elect to trigger a gain on their shares and claim ER where their shares are diluted below the 5% threshold by an issue of new shares by the company. This triggered gain can be deferred until the shares are finally disposed of. 

This dilution relief applies to individuals where; 

  • as a result of a relevant share issue, the company ceases to be an individual’s personal company (i.e. does not meet the 5% test for ER), and 
  • if immediately before the dilution, the individual would have been eligible for ER on the disposal of their shares.  

A relevant share issue is defined as being;  

  • shares issued by the company for consideration wholly of cash, and 
  • the shares issued must be a new issue for genuine commercial reasons.  

Care should be taken when exit only share options are exercised which dilutes other shareholders below the 5% ER tests at the time of a company disposal. It is common for these to be structured as a cashless exercise, where exercise price is offset against the sales proceeds on an exit.  

However, this may prevent the dilution Relief from being claimed by other shareholders as the share issue must be for consideration wholly of cash in order for the relief to apply. There is the suggestion that a cashless exercise of share options may prevent the other shareholders making the dilution election and claiming ER, therefore doubling their Capital Gains Tax charge.  

For more information on dilution relief, or how we can assist with making a successful claim for ER, please contact Gregor McCallan or your usual AAB contact.


By Gregor McCallan, Corporate Tax Manager at Anderson Anderson & Brown LLP 

To find out more about Gregor and the Entrepreneurial Tax Team, click here