Entrepreneurs' Relief - First Tier Tribunal
In Hunt v HMRC  UKFTT 0210 (TC) (26 March 2019) (Judge Anne Redston), the First Tier Tribunal upheld a decision regarding one of the key tests for Entrepreneurs’ Relief (ER). To recap, at the time of this particular claim, ER secured a 10% capital gains tax rate for an individual on a sale on £10m worth of lifetime gains where the individual was an officer or employee who had held 5% of the votes and 5% of the issued share capital of the company in which he was selling the shares for a period of at least one year. Where all those conditions were not met, the individual was subject to a 20% capital gains tax rate.
Both sides were in agreement that the appellant met the employment test and held 5% of the voting rights for the relevant period prior to a sale of those shares. However, Mr Hunt had been denied an ER claim on his personal tax return following an enquiry as he did not hold “5% of the issued share capital”.
Factually Mr Hunt did not hold 5% of the issued nominal share capital in the company, but his representative argued that the purpose of the ER provisions was to deliver a lower rate of tax to those who had made a genuine and material commitment to a business, and to simply refuse to grant ER on the basis of the nominal value of the share classes held could not be right, and that the Tribunal should take a “purposive, multi-factorial approach”.
The Tribunal were of the view that the case of Canada Safeway had set a clear legal precedent that referred to the ‘issued nominal share capital’ not issued shares, and that as the ER legislation is prescriptive, a multi-factorial approach was not appropriate.
The law is clear and those hoping to qualify for a 10% capital gains tax rate should tax advice to ensure that they do not fall foul of these provisions.
Please note for ER claims on or after 29 October 2018, the officer or employee must also have a right to 5% of distributable profits and 5% of the assets available to equity shareholders on a winding-up, or 5% of the proceeds if the whole of the ordinary share capital of the company were sold for its market value. In addition, from 6 April all those 5% tests must be met for two complete years prior to a disposal and a claim for relief.
Whilst we do not give tax advice at RM2, it is important to note that the 5% tests are not relevant where shares are acquired by an employee via an Enterprise Management Incentive (EMI) plan. An employee must hold their qualifying EMI option for two complete years prior to exercise and sale to qualify for ER. Please do contact us on 0208 949 5522 or email firstname.lastname@example.org if you would like to discuss the Enterprise Management Incentive (EMI) further and whether it might be appropriate for your company.