Entrepreneurs Relief - dilution problems

Entrepreneurs Relief - dilution problems

Didn't find your answer?

Client setting up a new company and share allocations are such that four key employees/directors will have 5% each.

We can't rule out that there may be some future fundraising and that this may result in equity allocations which could dilute the 5% shareholders, taking them below the ER threshold.

So the issue is, how do we protect against the effects of such dilution?  

Do we set up a Service Company which provides the services of these key execs and which will own the 20% of the trading company? (The key execs holding 25% each of the service company)

On a sale of the trading company (and simultaneous sale of the service company), will the key execs qualify for ER on their 25% shares of the service company?

Any other useful responses invited please! 

Replies (4)

Please login or register to join the discussion.

By eastangliantaxadvisor
05th Oct 2012 20:12

I would suggest you get the articles adjusted or draw up a shareholder's agreement to stop this from happening.

 

With your suggestion, you would might have a capital gain if the shares of the Service Comany, where to be sold, and then the costs of liquidating the Service company etc.

In addtion, what about IR35?

Thanks (0)
avatar
By blok
05th Oct 2012 20:35

.
Mmmm?
In theory the 4 would be entitled to er but you first of all need a reorganisation to get to that point. Who is to say that the purchaser would wish to buy the shares of the service co?
You will have the value of the 20 percent held by the company and the sse rules need close inspection.
I can't see IR35 as an issue if all income between service co and trade co is extracted as salary by the 4 owners.

Thanks (0)
Replying to WhichTyler:
avatar
By blok
05th Oct 2012 20:53

.
Need to caveat that. On reflection. The bigger issue is that service co will have 2 purposes, it is likely that the holding of the 20% by the company will deem it non trading.

The iht may be compromised as a result as well.

Thanks (0)
avatar
By tax for fun
05th Oct 2012 20:56

.

If the shares were issued to the employee/directors under EMI they would not need to hold 5% to qualiy or ER.

 

see

 

http://www.hmrc.gov.uk/budget-updates/march2012/emi-cgt-further-info.pdf

Thanks (0)