If a fundraising share issue for cash takes you below the 5% thresholds, so that the company stops being your personal company, you can elect to be treated as selling and buying back your shares at their value immediately before the issue. That locks in a gain which qualifies for Business Asset Disposal Relief, and a second election lets you defer the gain until you actually sell. The rules are in sections 169SA to 169SH of the Taxation of Chargeable Gains Act 1992 and apply to share issues on or after 6 April 2019.

What problem do the dilution rules solve?

To claim Business Asset Disposal Relief on shares, the company normally has to be your “personal company” throughout the two years ending with the sale. HMRC’s Capital Gains Manual at CG64050 explains that this means at least 5% of the ordinary share capital, at least 5% of the voting rights, and either 5% of distributable profits and assets on a winding up or 5% of the proceeds if the whole share capital were sold.

A founder who keeps working in the business can fall below those levels simply because the company raises money from investors. Without these rules, years of qualifying ownership would be lost. CG64053 notes that the first condition is also met where the new issue cuts your voting rights or economic entitlement below 5%, not only your share of the capital.

Who can make the election?

Section 169SC sets two conditions.

  1. The company stops being your personal company as a result of a relevant share issue. A relevant share issue is one where the shares are issued wholly for cash and are subscribed and issued for genuine commercial reasons, not as part of arrangements with a main purpose of securing a tax advantage for anyone.
  2. You would have qualified immediately before the issue. If you had sold all your shares and securities in the company at that moment, it would have been a material disposal of business assets, and a claim would have produced a net chargeable gain under section 169N(2). So the company must have been a trading company, you must have been an officer or employee for the previous two years, and the overall result must be a gain rather than a loss.

Shares issued in exchange for another company’s shares or for assets are not issued wholly for cash, so a dilution caused by an acquisition paid for in shares does not qualify.

How is the deemed gain worked out?

Where the election is made, you are treated as disposing of all your shares and securities in the company immediately before the issue and reacquiring them straight away at their “relevant value”. For shares, section 169SC(5) defines that as the amount that would be apportioned to them if the whole issued share capital were sold at market value at that time. CG64053 points out that this ignores any minority discount. Securities, such as loan notes, are taken at market value.

The reacquisition at relevant value also gives you a new base cost, so growth after the dilution is measured from that figure. Getting a supportable valuation at the date of the issue is the main practical task, and a recent funding round price is useful evidence.

Should you pay the tax now or defer it?

You have two options.

  • Pay now. Make the section 169SC election and claim relief on the notional gain for the tax year of the share issue. For a share issue on or after 6 April 2026 the gain is taxed at 18%, within the £1 million lifetime limit. You need cash to pay tax on shares you have not sold.
  • Defer. Make a supplementary election under section 169SD. No gain or loss accrues on the notional disposal; instead the deferred gain is added to whatever gain actually arises when you later dispose of shares or securities in the company.

On a deferred gain, three points need attention.

  1. Section 169SH(2) requires a fresh claim for relief by the first anniversary of the 31 January following the first tax year in which part of the deferred gain comes into charge. No further claim is needed for later slices.
  2. Section 169SH(3) says the relief calculation is carried out when the gain accrues, so the relief rate and lifetime limit used are those in force at the later sale, not at the date of the share issue.
  3. Section 169SH(5) treats the company as your personal company for that claim, but CG64053 notes that this does not affect the officer or employee requirement. If you are likely to step away from the business before selling, check this before choosing to defer.

What are the deadlines?

Step Deadline Source
Election to crystallise the gain First anniversary of the 31 January after the tax year of the share issue Section 169SG(2)
Election to defer No more than four years after the end of that tax year Section 169SG(3)
Relief claim on a deferred gain First anniversary of the 31 January after the tax year the deferred gain first comes into charge Section 169SH(2)

Both elections are irrevocable. If you make both and would not otherwise need a tax return for the year, section 169SG(4) lets you make them by notice by the first of those deadlines. For a share issue on 10 September 2026, the 2026 to 2027 tax year, the first election is due by 31 January 2029 and the deferral election by 5 April 2031.

How does the deferred gain come back into charge?

Section 169SD(2) uses three steps. The notional gain is first attributed to each class of shares or securities in proportion to the gains on each class. The amount for a class is then apportioned to the shares of that class you sell, by nominal value. Finally, the total brought into charge for a class can never exceed the amount attributed to it. Sections 169SE and 169SF stop the gain disappearing or being charged twice on a later reorganisation or conversion.

HMRC’s example at CG64053: John held 6% of JDM Ltd and a loan note with a nominal value of £300,000. A cash share issue on 1 August 2019 diluted him to 3%. His shares had a relevant value of £1,000,000 against a cost of £200,000, a notional gain of £800,000; the loan note, worth £310,000, gave a gain of £10,000. He elected to crystallise and defer the total of £810,000. When he sold half of his shares on 1 August 2020, half of the £800,000 attributed to the shares, £400,000, came into charge on top of his actual gain on those shares. The £10,000 on the loan note stays deferred until he disposes of it.

What does paying now look like?

Illustration only. Tom owns 6% of a trading company and is a director. On 1 October 2026 the company issues new shares for cash to an investor and Tom’s holding falls to 4%. His shares cost £20,000 and their relevant value just before the issue is £320,000, a notional gain of £300,000. He elects under section 169SC, does not defer, and has no other gains.

  • Notional gain: £300,000
  • Less annual exempt amount for 2026 to 2027: £3,000
  • Taxable gain £297,000 at 18%: £53,460

His new base cost is £320,000. Without the election, and assuming he stays below 5%, a later sale would not qualify and gains in the higher rate band would be taxed at 24%. See capital gains tax rates.

Where do people go wrong?

  • Treating any dilution as covered. The issue must be for cash and commercially driven; a share exchange or an issue for assets does not count.
  • Missing the first deadline. The crystallising election is due well before the four year limit for deferral, and there is no later route to make it.
  • Assuming deferral preserves today’s rate. The relief is calculated when the deferred gain comes into charge.
  • Overlooking employee share schemes. EMI option holders often never meet the 5% test and rely instead on the separate rules for BADR on EMI shares.
  • Weak valuations. The relevant value is a full pro rata value, so HMRC may examine it closely; keep the evidence used on the day.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.