News added on 29.04.2019

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CGT

Tribunal denies entrepreneurs’ relief to 5% shareholder

The First-tier Tribunal has found that an individual must hold 5% of the issued share capital by nominal value to qualify for entrepreneurs’ relief. Why did one taxpayer miss out?

Case facts. In Hunt v HMRC, the taxpayer (H) had become the chairman of FGL and invested £50,000 in the company. FGL’s existing share capital consisted of shares with a nominal value of £1 each. However, the company’s lawyer advised H to subscribe for shares with a nominal value of 10p each as this would be easier than issuing new £1 shares, which required the permission of the existing shareholders. H was advised that this would not impact his economic interest or voting rights in FGL. Over the course of H’s career, he obtained further shares in FGL and held 5.94% of all shares when the company was sold. H claimed entrepreneurs’ relief (ER) on his tax return to pay just 10% capital gains tax on the sale of his FGL shares.

Enquiry.  HMRC opened an enquiry into H’s tax return and decided that an individual must hold at least 5% of the issued share capital by nominal value to qualify for ER. Unfortunately, H only held 4.16% of the share capital by nominal value and so HMRC increased the tax due by almost £200,000.

Appeal. H appealed to the First-tier Tribunal (FTT) on the basis that the purpose of the ER legislation is to provide relief to individuals that have a real and material commitment to a business. H argued that it could not be correct to deny ER to an individual that held 5% of the voting rights, 5% of the total number of shares, 5% of the dividend rights and 5% of the capital on liquidation but not 5% of the share capital by nominal value.

Decision. The FTT found that the statutory definition refers to a percentage of the "issued share capital", not to a percentage of the number of shares. The ER legislation is highly prescriptive and each condition must be met to qualify for the relief. Due to the detail contained in the provisions, the judge decided that it is not possible to bypass a condition based on the general purpose of the legislation or import other factors to replace it. The FTT agreed with HMRC and rejected the appeal. This case highlights the importance of checking that your clients have 5% of the issued share capital by nominal value. H would have qualified for ER if he had recapitalised his 10p shares into £1 shares one year (note the ER minimum holding period has now changed to two years) before the sale.  

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