What a relief: deferred shares and entrepreneurs relief

If your company has shares with no dividend rights in issue, there are two recent First-tier Tribunal rulings regarding entrepreneur’s relief, which may have an impact on entrepreneurs’ relief for individuals and group reliefs for corporate shareholders.

Entrepreneur’s relief is a tax relief allowing individuals selling a business to pay capital gains tax at a reduced rate of 10%, applicable to the first £10 million of qualifying capital gains, realised on or after 6 April 2011 – as long as the lifetime limit has not already been reached on earlier disposals. However, the recent changes to the law may affect your right to claim for this reduction.

The ruling in Castledine v HMRC [2016] UKFTT 145 (TC) has held that any deferred shares, with no voting rights, dividend entitlement or expectation of distribution upon windup, form part of the ordinary share capital of a company.  To this end, entrepreneur’s relief was denied to a director who has held 5% of the voting rights and non-deferred ordinary shares – they are understood to have held 4.99% of the ordinary share capital only, and are therefore ineligible to claim.

The second ruling in McQuillan v HMRC [2016] UKFTT 305 (TC) however, has held that a holding of redeemable shares with no dividend rights are seen as fixed rate preference shares. Therefore, they are not included in the total of ordinary share capital, and in holding these a taxpayer has the 5% required to claim for entrepreneurs’ relief. Somewhat controversially, this new decision seems to contradict HMRC’s earlier practice – where shares with no dividend rights were still classed as ordinary share capital.

The second ruling rules does go against HMRC’s published views and any uncertainty now surrounding this issue will not be resolved until a high court rules on the decision.

These changes have potential implications not only for claiming entrepreneur’s relief, but also other provisions. Companies that have shares with no dividend rights in issue, or have placed reliance on deferred shares either counting or not counting as ordinary share capital, may now need to review their shareholdings, particularly if there are tax reliefs applicable to shareholders which are dependent on the shareholder holding more than a specified percentage of it.

If you have any questions about how these recent changes in the law might affect your own circumstances or business needs; or would like assistance on any other Corporate and Restructuring matter, please do not hesitate to contact me at Nick.Pickup@forbessolicitors.co.uk or on 0800 321 3258.

Nick Pickup

About Nick Pickup

Nick Pickup is a Solicitor within the Corporate and Restructuring team at Forbes Solicitors. Nick’s blogs cover his specialism of work on mergers and acquisitions, business start up’s, joint ventures, shareholder issues, company restructures and general company advice.
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