31 January 2021 deadline for joining the section 169 Q!

The issue

In the 2018/2019 tax year there were a number of transactions where shareholders took advantage of tax deferrals where shares were exchanged for other shares or loan notes. In cases where the shares qualified for Entrepreneurs’ Relief (ER) an election (called a section 169Q election) can be made to disapply this special treatment and trigger a taxable gain, but for 2018/2019 this election must be made by 31 January 2021.

From 11 March 2020 the lifetime limit for ER was cut from £10M to £1M and this was a good reason for some shareholders to make a section 169Q election. Given that capital gains tax rates will almost certainly increase over the next few years and due to the imminent filing deadline, shareholders of certain 2018/2019 transactions should now be giving serious consideration to making an election.

Example

In August 2018 John disposed of his shares in his trading company and made a gain of £10M. £4M of this consideration was in cash and £6M was in the form of shares in the acquiring company. As the shares qualified for ER John assessed himself to capital gains tax of £400,000, being 10% of £4M. The remaining £6M of the gain was deferred into the shares that he acquired from the acquiring company (to be triggered when he sold those shares).

John believes that there is a good chance that his shares will be sold in the next couple of years and that he will make a gain of £10M when this takes place (including the deferred gain of £6M mentioned above).

By making a section 169Q election John can effectively choose to have the deferred £6M taxed at 10% in 2018/2019. If he were to do this then he would have to pay £600,000 in addition to late payment interest from 31 January 2020. If he did not do this then in the event of a sale the full gain would be taxable at 20% (or whatever the rates are at the date of disposal). This strategy is therefore likely to save at least £600,000.

Forbes Dawson view

Often section 169Q decisions for 2018/2019 transactions would have been made at the time of submitting the tax return (31 January 2020) and so may have been ‘put to bed’. This is a very special year because the reduction in the lifetime ER allowance, along with likely increases to capital gains tax rates, means that there will be a compelling reason to make an election in many cases. However, great care needs to be taken. There is a risk that an election is made and then the later sale does not take place, or the company collapses. In these scenarios, the shareholder would not be able to recoup the tax paid in respect of the election and would either have to await a sale (in the first case) or trigger a capital loss (in the second case) which he may not be able to relieve.

Although the decision may be difficult to make, there does need to be some thought given to this before the tax filing deadline.

 

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