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Case law: Court removes doubts over whether shares with no dividend rights can be eligible for entrepreneurs' relief
Company directors and employees holding shares in their company which have no dividend rights will welcome confirmation that this will not, of itself, stop them claiming tax savings under the entrepreneurs' relief scheme.
Entrepreneurs' relief significantly reduces the capital gains tax payable by individual directors and employees on a 'material disposal' (or a disposal 'associated' with a material disposal) of their 'qualifying' company shares, provided certain conditions are met. The relief also applies if they meet these conditions in relation to a holding company of a trading group.
One of the conditions is that the director or employee must hold at least five per cent of the ordinary shares and voting rights in their company. Ordinary shares means 'all the company's issued share capital (howsoever described), other than capital the holders of which have a right to a dividend at a fixed rate but no other right to share in the company's profits'.
A recent ruling said that the relief was applicable in cases where a shareholder held non-voting, redeemable company shares which carried no rights to a dividend, as shares with no right to a dividend did not have a right to a dividend at a fixed rate. They therefore counted as ordinary shares when calculating whether an individual held five per cent of the company's ordinary share capital.
However, in a further case, the First-tier Tribunal had previously said that shares with no right to a dividend were shares with a right to a dividend at a fixed rate - it was just that the fixed rate was zero. The shares with no entitlement to dividend were therefore not part of the ordinary share capital of the company and did not qualify for entrepreneurs' relief. The two decisions were therefore inconsistent.
The Upper Tribunal has now overruled the First-tier Tribunal in the second case, and confirmed that shares with no dividend rights do not have a right to a fixed rate dividend of 0%, and are therefore part of the company's ordinary share capital after all. This decision is consistent with the decision in the other case and gives welcome clarity to shareholders holding such shares.
- Company directors and employees holding shares in their company which have no dividend rights can now be confident that their shares count as ordinary shares, and this will not prevent them from taking advantage of entrepreneurs' relief scheme to save tax when they sell their shares
Case ref: Castledine v HMRC  UKFTT 145 (TC)
HMRC v McQuillan UT/2016/0141
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