Mark McLaughlin warns that a lack of precision or forward planning can have expensive consequences for tax purposes.
The UK tax system does not generally offer ‘wriggle room’ for imprecision when it comes to satisfying conditions for tax relief. Furthermore, the tax legislation rarely offers any scope to correct unintended consequences. HM Revenue and Customs (HMRC) officers usually point out that they can only apply the law to what actually happened, not necessarily what the taxpayer intended to happen. The more prescribed the rules, the more difficult it can be to comply with them.
For example, an individual disposing of shares in a company is eligible to claim business asset disposal relief (previously entrepreneurs’ relief) for capital gains tax purposes if, throughout two years (or one year, for disposals before 6 April 2019), the company is the individual’s personal company and 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)).
Nothing ‘personal’
The meaning of ‘personal company’ was tightened for disposals from 29 October 2018. For earlier disposals, a company is a personal company if at least 5% of the ordinary share capital is held by the individual, and at least 5% of the voting rights are exercisable by the individual by virtue of that holding. However, further personal company requirements were added in terms of ensuring either beneficial entitlement to at least 5% of profits available for distribution to the company’s equity holders and beneficial entitlement to at least 5% of assets available for distribution to equity holders on a winding up of the company, or alternatively that in the event of a disposal of the whole of the company’s ordinary share capital, the individual would be beneficially entitled to at least 5% of the proceeds.
This 5% test is absolute. There is no concept of ‘rounding up’ to the nearest whole number; at least, that is HMRC’s approach.
For example, in Kavanagh v Revenue and Customs [2022] UKFTT 173 (TC), the taxpayer was a 50% shareholder and director of a trading company (E). In December 2005, another company (BGH) acquired all the shares in E from its shareholders in return for the issue of new shares by BGH. The percentage of shares subsequently held by the taxpayer (who also became a director of BGH) was 4.997285706531%. On 31 January 2017, BGH’s shares were acquired by a third-party company. HMRC subsequently refused the taxpayer’s claim for entrepreneurs’ relief on his disposal of shares in BGH, as he did not hold at least 5% of the ordinary share capital of BGH and at least 5% of the voting rights of the company by virtue of that holding.
Nice try, but…
The taxpayer argued that, whilst his registered ownership and voting rights were 4.997285706531%, he was the beneficial owner of the remaining 0.002714293469% of the shares (i.e., slightly less than one share). This was on the basis that other shareholders held that percentage on trust for the taxpayer.
Unfortunately, the First-tier Tribunal (FTT) found there was no agreement or understanding that any shares not registered in the taxpayer’s name were held by any of the other shareholders on his behalf. The FTT concluded that the taxpayer was not entitled to any further beneficial interest in the disputed shares. His appeal was dismissed.
Practical tip
It would arguably have been reasonable for HMRC to round up a shareholding percentage of 4.997285706531% to the nearest whole number. However, HMRC is not necessarily known for its reasonableness! So, check the relevant tax legislation before transactions take place, and plan ahead, if necessary.
