CGT - Entrep. Relief on share for share?

CGT - Entrep. Relief on share for share?

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I have a client who has received shares in Newco in exchange for his shares in a private limited company. He owned >5% of the old company, had the shares for several years and qualifies for Entrepreneurs Relief. The shares in Newco are worth about £200k at the time of receipt. As the original shares in the old company had negligible cost, the £200k is all gain. He owns <5% of the new company, though he is an employee. As this is a share-for-share exchange, the £200k gain gets carried over to the shares in Newco.

My question is this: when the shares in Newco are eventually sold, is the £200k gain entitled to ER or is the ownership of the shares in Newco looked at to determine whether ER is available? (I am aware that he could elect to crystallise the gain at the time of the share-for-share exchange and ensure he gets ER.)

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By gbuckell
15th Dec 2011 11:41

No

Because he now owns less than 5% ER is lost. As you mention the only solution, if it can be termed a solution, is to elect to disapply the share for share rules. It was for this scenario that this rule was introduced - small comfort!

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By dbowleracca
17th Dec 2011 09:26

Would this work
What if he has a second company, which he owns 100%, which then holds the shares in newco? The 100% would then qualify for ER wouldn't it?

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By blok
17th Dec 2011 16:44

.

that wont work because the transfer of the shares into newco will trigger the gain and no ER would be available.  the share for share rules at s135 wont be met on the second transferso it would be taxable.  no reconstruction relief as not for bona fide commercial reasons.

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By dbowleracca
17th Dec 2011 21:51

How about this for an idea
Don't crystallise the gain yet, hold it over into shares in newco.

Then when shares in newco are sold invest proceeds in an EIS and hold over the gain, and then dispose of EIS shares in trenches to utilise cgt annual exemption each year after the 3 year holding period and that should avoid any cgt.

Also a nice little income tax reducer too if you have sufficient taxable income in the year of investment.

Does this cunning plan work?

I am aware that there is also now this see capital EIS arrangement too with 50% income tax relief, but don't know much about it yet

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By gbuckell
19th Dec 2011 09:34

EIS

Your idea will work in principle. How effective it will be depends on the size of the capital gain - it could take many years if the gain is large. Also there has been a rumour, and I stress only a rumour, that the capital gains tax exemption might be drastically cut. Personally I don't think this is likely but you can never be sure!

Re your other idea, I think blok shot it down but if you want the final coup de grace the new company would be an investment company and not qualify for ER.

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