In actual fact the question should probably be when is a share definitely a share? At least as far Entrepreneurs’ Relief (ER) is concerned anyway.
If you are thinking about selling your business you need to make sure that what you think of as Ordinary Share Capital will indeed be considered as such, because this could determine the availability of ER, and wouldn’t it be a nasty shock to find out post disposal that your shares were non- qualifying?
To qualify for ER the shares which are being disposed of must be shares in the shareholder’s “personal company”, amongst other things; that is to say that the shareholder must hold at least 5% of the Ordinary Share Capital of the company.
This magical 5% is measured by reference to the nominal value of the Ordinary Share Capital.
Ordinary Share Capital, in relation to a company, means all the company’s issued share capital (however it might be described), but here’s the rub; the legislation goes on to say ‘other than fixed rate preference shares’.
Fixed rate preference shares are broadly defined as shares having a right to receive a dividend at a fixed rate but having no other right to share in the company’s profits.
It would appear that the question of what is a fixed rate preference share should be relatively clear-cut. In practice, however, it can be difficult where there are a number of different share classes, and HMRC’s view on the matter has been ambiguous in the past.
In the last 3 years two First-tier Tribunals reached different conclusions as to whether shares with no right to dividends constituted Ordinary Share Capital. Both cases were appealed.
We have seen an Upper Tribunal case determine that a class of redeemable shares with no dividend entitlement does form part of a company’s Ordinary Share Capital. Whereas a second case found that deferred shares with little value and no dividend rights were also part of a company’s Ordinary Share Capital.
What has been highlighted is that expert advice should always be obtained prior to altering the share structure of a company, or when preparing a company for sale.
The implementation of structures with differing share rights can have enormous consequences when it comes to a company exit.
Want to know more? Call us on 0117 974 2569 or email email@example.com