Don’t forget to join the section 169Q!

The issue

Cast your mind back to 11 March 2020, just before the world was about to be turned on its head and things like tax rates were a big deal. That was the day that the lifetime Entrepreneurs’ Relief allowance was slashed from £10m to £1m in the Budget. Between 6 April 2019 and 10 March 2020 there will have been transactions where shareholders took advantage of share exchange rules to avoid crystallising a gain on paper for paper exchanges. Those shareholders may now benefit from what is known as a ‘section 169Q election’.


In May 2019 Steve sold shares in his lawn mowing business, Country Mowers Ltd to Global Mowers Inc for £7m, making a gain of approximately £7m because of his negligible base cost. The consideration was made up of £3m cash and £4m of shares in Global Mowers Inc.

A clearance from HMRC had been obtained in respect of this transaction and so Steve duly declared a £3m gain in his 2019/2020 tax return. He was advised that the £4m worth of shares in Global Mowers Inc ‘stood in the shoes’ of his old shares in Country Mowers Ltd and therefore had a negligible base cost for tax purposes. As Steve has now used up all of his Entrepreneurs’ Relief allowance (or Business Asset Disposal Relief as it is now called) he faces the prospect of being taxed at 20% on any proceeds that he receives on a disposal of his shares in Global Mowers Inc.

Section 169Q election

In the above example, Steve should be able to make what is known as a section 169Q election by 31 January 2022. This has the effect of disregarding the share for share rules and ‘volunteering’ to be taxed on the full £7m, rather than just the £3m. The advantage of doing this is that the full £7m should qualify for Entrepreneurs’ Relief based on the rates that were in force at the time of the transaction. Steve will therefore be ‘volunteering’ to pay £400,000 now rather than (at least) £800,000 on a future disposal of Global Mowers Inc (assuming that they have at least maintained their £4m value). As a result, these shares will then have a tax base cost of £4m for future disposals.

Forbes Dawson view

Anybody who was involved in a 2019/2020 transaction involving share exchanges (and loan note exchanges for that matter) should consider the benefits of making a section 169Q election (or 169R election for some classes of loan note). Whether the election will be advantageous, will largely depend upon how the company has performed since the transaction and the prospect of an exit event. The main disadvantage is that the shareholder will have to pay additional tax within 30 days of making the claim (and this will be a ‘dry’ tax charge). As mentioned above, the true benefit of making a claim may not be immediately apparent because we do not know what will happen to capital gains tax rates in the future – although they are heavily tipped to rise.

Various anti-forestalling rules were introduced preventing a section 169Q claim being used where holding companies were inserted purely to make use of the election. However, the election should generally apply to commercial third-party transactions.




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