September Tax Tribunal case throws 10% entrepreneur’s relief capital gains tax rate into doubt in certain cases
You may remember there were 2 ostensibly contradictory lower tax tribunal cases last year. One held that worthless zero dividend shares were not part of a company's ordinary share capital (the McQuillan case). The other ruled that worthless deferred shares were part of a company's ordinary share capital (the Castledine case). Why where these cases important? It was all to do with whether some employees with smaller shareholdings had more or less than 5% of the share capital of a company. This in turn was important in determining whether or not those small shareholders got the beneficial 10% entrepreneurs relief (ER) Capital Gains Tax (“CGT”) rate on the sale of their shares: less than 5%, they didn't; more than 5%, they did.
The McQuillan lower tax tribunal case was therefore very helpful for taxpayers (although, of course, lower tax Tribunal decisions don't set any precedent which HMRC must abide by). Well, any help or hope that that McQuillan case may have given small shareholders has been wiped out by the result delivered this month of HMRC’s appeal to the Upper Tribunal in the McQuillan case. The Upper Tribunal overturned the lower tax tribunal’s decision of 16 months earlier and ruled that zero dividend shares were part of a company’s ordinary share capital.
For most professionals concerned, this at least restores order. Either both Castledine and McQuillan should have been found in favour of the tax payer, or both in favour of HMRC, but not one for HMRC and one for the taxpayer. At least we now know where we are on this issue even if it is not good news.
The message here now is that any individual with a small shareholding in a company of just over 5% when worthless zero-dividend shares were excluded from the count of ordinary share capital and whose shareholding benefitted from the 10% ER rate of CGT because of this when it was disposed of in the last few years, needs to revisit this in the light of the McQuillan Upper Tribunal decision. Anyone who has a small holding in a company of 5% or more when zero-dividend shares are ignored who has yet to sell that holding and is relying on the McQuillan lower tax tribunal decision to get a 10% ER rate when their shares are sold also needs to revisit their situation to see if anything can be done before any sale of their shares to resecure the 10% ER rate for their shares, if the McQuillan Upper Tribunal decision means their shareholding no longer qualifies for this.