A tightening of conditions for capital gains tax (CGT) entrepreneurs’ relief (ER) in Finance Act 2019 may have resulted in some taxpayers no longer qualifying for the relief.
Personal company
For example, an individual disposing of shares in a company is eligible to claim ER if throughout two years (increased from one year, for disposals from 6 April 2019) the company is the individual’s personal company and is a trading company (or the holding company of a trading group) and the individual is an officer or employee of the company (or a trading group member) (TCGA 1992, s 169I(6)).
The meaning of ‘personal company’ (in s 169S(3)) changed for disposals from 29 October 2018. For earlier disposals, a company is a personal company if at least 5% of the ordinary share capital is held by the individual, and at least 5% of the voting rights are exercisable by the individual by virtue of that holding.
However, Finance Act 2019 added further personal company requirements for disposals from the above date, either in terms of beneficial entitlement to at least 5% of profits available for distribution to the company’s equity holders and beneficial entitlement to at least 5% of assets available for distribution to equity holders on a winding up of the company, or alternatively that in the event of a disposal of the whole of the company’s ordinary share capital the individual would be beneficially entitled to at least 5% of the proceeds.
Company formalities
Some individual shareholders might not qualify for ER as a result of the above changes, and amendments to the company’s constitution may be necessary to ensure that the shares comply with the amended ‘personal company’ requirements. Furthermore, the shareholder would need to meet the conditions for at least two years prior to a disposal of their shares.
In some cases, shares may have been issued before the ER changes, which were always intended to satisfy the ER conditions. Following a sale of the company’s shares, could it be argued that the shareholder ought to be allowed ER notwithstanding the above changes, even though they would not qualify on a literal reading of the amended legislation?
Promises, promises
In George v Revenue and Customs [2018] UKFTT 509 (TC), the taxpayer’s shares did not satisfy the personal company definition. The chairman of the company’s board of directors therefore undertook that the taxpayer’s shares would qualify for ER (i.e. by giving them voting rights). However, the company’s special resolution conferring voting rights was not made until around seven months before the company was sold (i.e. less than the minimum period for satisfying the ER conditions).
The taxpayer argued that his shares should be treated as qualifying for ER under a legal principle (i.e. an ‘equitable maxim’) based on the company chairman’s undertaking. Unfortunately for the taxpayer, this argument failed before the First-tier Tribunal.
The lesson is therefore that taxpayers should ensure that the necessary company formalities are undertaken in support of ER (or other tax) claims, and tax elections.
The above article was first published in Tax Insider in April 2019 (www.taxinsider.co.uk).
