Entrepreneurs’ relief: do you own enough "ordinary shares"?

In a ruling that has potentially adverse implications for some of those expecting to be eligible for Entrepreneurs’ Relief (“ER”) on a sale of their…

In a ruling that has potentially adverse implications for some of those expecting to be eligible for Entrepreneurs’ Relief (“ER”) on a sale of their shareholdings, the First-tier Tribunal (Tax Chamber) has held that deferred shares with no voting rights, no dividend entitlement and no realistic expectation of a distribution on winding up formed part of the ordinary share capital of a company (Castledine v HMRC [2016] UKFTT 145 (TC)).

Consequently, such shares must be included when calculating whether an individual holds the requisite 5% of ordinary shares in the capital of the company for ER purposes.

As regular readers will know, ER is relief from capital gains tax (“CGT”) which, if applicable, reduces the rate of CGT from 28% to 10% on the first £10,000,000 of gains. ER applies to a disposal by an individual of company shares or securities (including an interest in shares or securities) provided that, throughout the period of one year ending with the date of the disposal, all of the following conditions are met:

  • The company is a trading company (or the holding company of a trading group);
  • The individual holds at least 5% of the nominal value of the company's ordinary share capital, allowing the individual to exercise at least 5% of the voting rights; and
  • The individual is an officer or employee (full or part time) of the company or, if the company is a member of a trading group, of one or more companies which are members of the trading group.


Alan Castledine was a founder shareholder of Park Resorts Limited, which he sold in 2007 for a combination of cash and loan notes. However, he was recalled a year later and given 5% of the ordinary share capital. Mr Castledine disposed of his loan notes in 2011 and 2012 and claimed ER against the charge to capital gains on the disposal of the loan notes (being securities in the company), as he held 5% of the ordinary share capital.

HMRC enquired into the matter and, when they inspected the company’s statutory books, discovered that, in addition to the ordinary ‘A’ and ‘B’ shares of which Mr Castledine held 5% of the aggregate, there was a third class of ‘deferred shares’ in issue, which had been created as a mechanism for effectively removing shares from senior managers on their departure without having to formally buy back and cancel the shares on their exit. These shares had no voting rights or rights to dividends and had no realistic expectation of a distribution on winding up. Essentially, they were considered by those involved to be worthless and had been forgotten about. However, if, as HMRC contended, these deferred shares formed part of the ordinary share capital, Mr Castledine’s shareholding would only equate to 4.99% of the nominal value of shares in issue and he would not satisfy the ER conditions.


Counsel for Mr Castledine argued that Parliament could not have intended shares with no economic value to rank equally with participating, voting shares. However, the Tribunal could not find any flexibility to support this view in the definition of “ordinary share capital” in section 989 Income Tax Act 2007: “all the company’s issued share capital (however described), other than capital the holders of which have a fixed right to a dividend at a fixed rate but no other right to share in the company’s profits.” Consequently, the ER conditions were not met and the gain was taxable at the main 28% rate of CGT.

How could this affect you?

The ruling demonstrates the importance of obtaining robust legal and tax advice whenever these types of arrangements are contemplated, to ensure that ER conditions are met. It is also imperative that companies monitor the impact on these arrangements of any alteration to the share capital. Any companies that have deferred shares in issue should review the impact of those deferred shares on the shareholdings of employees and directors to ensure they do not dilute any holdings below 5%. Where any issues arise, advice should be sought on the implications and possible solutions.

If you are interested in finding out more about this or any other taxation issue, please contact Haydn Rogan, a partner in the corporate department, on 0161 241 0517 or email haydn.rogan@weightmans.com.

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