Most individual shareholders of family and owner-managed trading companies will no doubt be aware of the 10% rate of capital gains tax (CGT) that applies if an entrepreneurs’ relief (ER) claim is available on gains (of up to £10 million) on the disposal of their shares. However, those shareholders will probably be less familiar with the ER conditions that need to be satisfied for a successful claim to be made.
In many cases, the key conditions for ER are that, throughout the year ending with the date of the share disposal, 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)).
Don’t go too soon!
On the face of it, the ‘officer or employee’ requirement seems straightforward enough (e.g. was the individual a company director or secretary?). However, watch out for the date when the shareholder’s office or employment is about to end.
For example, if an individual resigns as a director some time before selling his or her shares in the company, the individual will not have been an officer throughout the one-year period ending with the date of the share disposal, and the above ER condition will not be satisfied (unless he or she was also an employee, and remained as such upon the disposal).
What do you do for a living?
The terms ‘office’ and ‘employment’ for ER purposes (in TCGA 1992, s 169S(5)) take their meaning from separate legislation (in ITEPA 2003). An ‘office’ is defined (in ITEPA 2003, s 5(3)) as including any position which exists independently of the person holding the position (e.g. a director or secretary, as indicated above).
An ‘employment’ is defined as including any employment under a contract of service (ITEPA 2003, s 4). A written contract of employment will normally help, although whether or not an individual is an employee is ultimately a question of fact. In cases of doubt, the following First-tier Tribunal decisions in the taxpayers’ favour (although not legally binding) may be helpful.
- In Corbett v Revenue & Customs  UKFTT 298 (TC), the tribunal decided that the taxpayer was entitled to ER on a sale of shares, as it was held on the facts that she remained an employee of the company despite having been removed from its payroll several months before the shares were sold (nb her employment duties had continued, and her remuneration was redirected to her husband).
- In Hirst v Revenue & Customs  UKFTT 924 (TC), it was held that the taxpayer remained an employee throughout the relevant one-year period ending with his disposal of the shares, notwithstanding that he had previously resigned his position with the company, and was eligible for ER on the disposal. The tribunal accepted that he had not been paid commission entitlements due to personal circumstances at the time, and because his financial needs were satisfied by dividend payments received from the company. The company had continued to provide him with a phone and laptop, and met the costs of his home internet contract.
Change the lightbulbs!
In one case I have seen, HMRC tried to argue that a shareholder had not been an employee of the company. However, after looking beyond the terms of the individual’s contract of employment HMRC were satisfied that the individual was an employee, notwithstanding that he had not been paid as such by the company when his shares were sold.
In particular, the facts that convinced HMRC of the individual’s employment included that the shareholder maintained the business premises (e.g. replacing lightbulbs when necessary) and even inspecting the toilet facilities!
Leave nothing to chance. HMRC guidance (at CG64110) states that there are no specific requirements for ER purposes regarding either working hours or remuneration levels. However, ensure that there is commercial substance to the working arrangements, and that actual employment duties accord with a written contract of employment, and continue to the share sale.
The above article was first published in Property Tax Insider (December 2015) (www.taxinsider.co.uk).