In Guy Holland Bosworth v HMRC [2020] TC7811, the First Tier Tribunal (FTT) refused a claim of Entrepreneurs' Relief where the B shares sold did not meet the personal company conditions. The company articles clearly stated that the shares did not have voting rights.
Entrepreneurs' Relief (ER) applies to capital gains made on the disposal of shares in a company when certain conditions are met, including the company being the individual’s personal company for the requisite time period. Prior to 28 October 2018 this required the individual to hold at least:
- 5% of the company’s ordinary share capital and
- 5% of voting rights by virtue of that shareholding.
Guy Holland Bosworth had held a 50% shareholding in The Hayward Holding Group Ltd (THHGL) (the Company).
- In 2007 he and his business partner sold to a third party, retaining 37 shares each and continuing as company directors.
- Their shares were re-designated as B shares. The company Articles of Association were amended giving the B shares rights to capital in a winding up only. Specifically, they did not have rights to income or voting rights. The purchaser’s shares became A shares with full rights.
- In 2013 a bonus issue of B shares was made to give the B shareholders 5% of the total issued share capital.
- In 2014 Mr Holland Bosworth sold all of his B shares and claimed ER.
- HMRC enquired and issued a closure notice denying ER. The taxpayer appealed on the grounds that:
- The rights attached to the B Shares in the Articles were incorrectly described.
- The B Shares had full voting rights; the majority shareholder would have agreed to amend the articles accordingly, and several years of annual returns had been filed stating that the B shares had full rights.
The FTT denied the appeal.; Whilst the appellant did hold 5% of the Company’s shares he did not have 5% of the voting rights:
- The Articles of Association could not have been clearer and as such did not require interpretation. The B shares had no voting rights. They did provide for the rights of the B shares to be ‘altered or abrogated’ but there was no evidence that they had been.
- The judge did not dispute that the B shareholders may, as the appellant asserted, have been present at company general meetings but there was no evidence that they had voted or that the Company considered they were entitled to vote.
Comment
The decision here was swiftly made and at first sight, it is surprising this case even reached the Tribunal given the facts. It is, however, not uncommon for a company to have habitually filed incorrect annual returns, or for taxpayers to look at the number of shares they hold and believe that they meet the 5% test without checking what the company articles say about share rights. With the changes to the ER conditions from October 2018 and April 2019, this has become even more important, especially where there are several different share classes in issue.
Links
Entrepreneurs' Relief: Disposal of a business
When does Entrepreneurs' Relief apply? What is the rate of Entrepreneurs' Relief? How to claim Entrepreneurs' Relief. Case law on Entrepreneurs' Relief.
Entrepreneurs' Relief: disposal of shares or securities in a company
Entrepreneurs' Relief (ER) is a Capital Gains Tax (CGT) relief that is available on the disposal of business assets, including a disposal of qualifying shareholdings in trading companies or trading groups by an officer or employee.
ABC or Alphabet shares: Family companies
This guide examines the tax consequences of creating new share classes in a family company in order to split income with a spouse or close family members.
ABC or Alphabet shares: Employees
How do you tax ABC or alphabet shares? How do you tax employee shares?
External link
Guy Holland Bosworth v HMRC [2020] TC7811