SolvedCG64050 | Business Asset Disposal Relief: shares or securities: personal company
From HM Revenue & Customs · Capital Gains Manual
Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.
A company will be an individual’s “personal company” if the individual
holds at least 5% of the ordinary share capital of the company, and
that holding gives them at least 5% of the voting rights in the company
Where a disposal is made on or after 29 October 2018, there is a further requirement that the individual has a sufficient economic interest in the company. TCGA92/S169S(3)(c) requires one of the following conditions to be met:
Condition (i) is that the holding would entitle the individual to at least 5% of the profits available for distribution and would entitle the individual to at least 5% of the company’s assets on a winding up. These are the based on the amounts available to “equity holders” as defined in CTA10/S158. “Equity” has a wider meaning than “shares”. Or
Condition (ii) is that the individual would be entitled to at least 5% of the proceeds of a disposal of the whole of the ordinary share capital of the company.
These are referred to as conditions (i) and (ii) here and at CG64051.
Either or both of these conditions must be met when the company in which the shares are held is required to qualify as the individual’s personal company. For straightforward share disposals the requirement will need to be met in the period leading up to the disposal in question, which is one year for disposals made before 6 April 2019 and two years for disposals made on or after that date.
Condition (i) should apply for companies with a single class of issued shares that gives each holder the same rights. Condition (ii) should be considered first in other cases. These conditions and the anti-avoidance rule that applies to condition (ii) are considered in detail on page CG64051.
Where two or more persons hold shares jointly, each person is to be treated as the sole holder of so many of the shares that is proportionate to the value of that person’s share. For example, where spouses or civil partners own a joint 100% shareholding equally, they are treated as each holding 50% of the shares, 50% of the voting power and an entitlement to 50% of the proceeds on disposal of the whole of the ordinary share capital.
Note, however, that shares held, or voting rights which an individual may be able to exercise, in the capacity of a trustee of a settlement cannot be counted towards the individual’s 5% total held in his or her personal capacity. Similarly, a qualifying beneficiary of a settlement cannot include shares (and voting rights) held in the settlement in determining whether they hold the 5% necessary for the company to be their “personal company”.
Any voting rights which come into force only in certain circumstances are not ‘exercisable’ while those circumstances do not exist. For example, preference shares in a company may entitle the shareholder to a vote only if the dividend on these shares was six months in arrear at the date of the company’s annual general meeting. Such votes would not be exercisable if the preference dividend never fell into six months’ arrear.
But the Retirement Relief case of Hepworth v Smith (54TC396) makes it clear that it is not necessary for voting rights actually to be exercised for them to be exercisable. Vinelott J said what one has to look at is the factual question whether voting rights exercisable in general meeting are or are not exercisable by the individual claiming relief.
Ordinary Share Capital
For the purposes of Business Asset Disposal Relief “ordinary share capital” has the meaning given by the Income Tax Acts. ITA2007/S989 says it means all of a company’s issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits.
On the authority of Canada Safeway Ltd v IRC (73TC374) it is the nominal value of the ordinary shares rather than the number of ordinary shares that have been issued or the amount subscribed for those shares that must be taken into account for the purposes of ITA2007/S989. The CT Structure Team in BAI has technical responsibility for ITA2007/S989 (previously ICTA88/S832(1)).
HMRC guidance on the meaning of “ordinary share capital” can be found in the Company Taxation Manual at pages CTM00511 to 00516.
Note that CTA10/S160 contains the definition of “ordinary shares” which is different to “ordinary share capital”. Both definitions are relevant for the economic interest “condition (i)” referred to above and at CG64051, TCGA92/S169S(3)(c)(i).