June 2016: Companies that have shares with no dividend rights in issue may need to review their impact on the shareholdings of employees and directors and, if necessary, consider either their cancellation or conversion in the light of two recent decisions.

In the first, the First-tier Tribunal (Tax Chamber) 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. Accordingly, a director who held 5% of the voting rights and non-deferred ordinary shares held, for the purposes of entrepreneurs’ relief, only 4.99% of the ordinary share capital and thus did not qualify for relief.

In the second, the tribunal held that a class of redeemable shares with no dividend entitlement were fixed rate shares and therefore did not form part of the ordinary share capital of the company.

Both decisions have potential implications for entrepreneurs’ relief and for other provisions where it is necessary to determine the percentage of ordinary share capital held by a taxpayer, such as whether the taxpayer has a material interest for the purposes of a tax-advantaged share scheme, or is connected with the issuing company in relation to an enterprise or seed enterprise investment scheme.

This business briefing highlights the key features of entrepreneurs’ relief.

What is entrepreneurs’ relief?

  • Entrepreneurs’ relief is a relief from capital gains tax that is available to individuals and trustees
  • It can be claimed for gains from the disposal of businesses, shares in personal companies and the associated or post-cessation disposal of business assets
  • The effect of the relief is to apply a capital gains tax rate of 10% to the first £10 million of qualifying capital gains (after deduction of any related losses) realised on or after 6 April 2011 (to the extent that the lifetime allowance has not been used by claims for entrepreneurs’ relief on earlier disposals)

What are qualifying capital gains? Qualifying capital gains arise from the disposal by an individual of:

Shares or securities of a trading company (or holding company of a trading group) 

  • For at least one year up to the date of the disposal, the individual must have
    • held at least 5% of the ordinary share capital of the company, allowing him to exercise at least 5% of the voting right, and
    • been a director or employee of the company (or a company in the same group)
  • Relief may be available even if the company had ceased trading. This is on the basis that the above conditions were satisfied for at least one year, ending with the date on which the company ceased trading, and the trading ceased within three years ending with the date of the disposal
  • Special rules apply for shares acquired by employees on exercise of options under the Enterprise Management Incentive scheme

The whole or part of a business as a going concern

  • The individual must have owned the business (whether as a sole trader or in partnership) for at least one year up to the date of the disposal
  • Shares and securities and other assets held by the business for investment purposes or assets not used for the purposes of the business, will not qualify for relief. However, the following disposals will qualify for entrepreneurs’ relief
    • disposals by sole traders when converting to a partnership
    • part disposals by existing partners when a new partner joins a partnership or there is a change in profit-sharing ratios, and
    • full disposals by partners

Assets formerly used in a qualifying business which simply stopped, rather than being sold as a going concern: The assets must be sold within three years after the business has ceased trading. The individual (whether as a sole trader or in partnership), must have owned the business for at least one year, ending with the date on which the business ceased trading.

Personal assets used by a trading company or partnership

  • The assets must be owned by someone qualifying for the relief on a disposal of the business or shares (or other securities) in the company
  • The individual must be withdrawing from the business. Withdrawal from the business means reducing his share in the partnership capital and profits or significantly reducing his shareholding in a company (anti-avoidance provisions apply)
  • The asset must have been used by the partnership or company for its business purposes for at least one year up to the date of the disposal of the business or shares (or other securities) and owned by the individual for three years

Lifetime limit: The lifetime limit for entrepreneurs’ relief increased from £5 million to £10 million on 6 April 2011.

Relief must be claimed: Entrepreneurs’ relief must be claimed. The claim must be made on or before the first anniversary of 31 January after the tax year of disposal. Therefore, if a disposal or deemed disposal is made on 1 May 2016 (that is, in the 2016/17 tax year), relief must be claimed on or before 31 January 2019.

Shares or loan notes received as consideration for shares: Unless the seller will meet the entrepreneurs’ relief criteria when the replacement securities are eventually sold, deferring the gain may not be beneficial.

  • To take advantage of entrepreneurs’ relief, the seller can elect to disapply the normal rules and include the value of the shares and loan notes received in the computation of the taxable gain
  • Making this election will mean that tax must be paid on 31 January following the tax year in which he sells his personal company shares


  • An earn-out is an arrangement where at least part of the purchase price on the sale and purchase of a business is calculated by referring to the future performance of the business being purchased. They are commonly used as a management incentive where owner-managed businesses are sold and the managers continue to work in the business following the sale
  • Claiming entrepreneurs’ relief may affect how earn-outs on a share sale should be structured. A seller whose earn-out right is can be satisfied only in shares or loan notes may prefer to elect to crystallise a tax charge at the time of the share sale (rather than defer the gain)

The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at April 2015. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.