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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Entrepreneurs’ Relief: shares or securities: personal company

TCGA92/S169S (3) and TCGA92/S169S (4)

TCGA92/S169S (3)

A company will be an individual’s personal company if he or she holds at least -

  • 5% of the ordinary share capital of the company, and
  • that holding gives him or her at least 5% of the voting rights in the company.

TCGA92/S169S (4)

Where two or more persons hold shares jointly each person is to be treated as holding the appropriate proportion of the total holding and associated voting power. For example, where a husband and wife or civil partners own a joint 100% shareholding equally they are treated as each holding 50% of the shares and 50% of the voting power.

Note however that shares held, or voting rights which an individual may be able to exercise, as a trustee of a settlement CANNOT be counted towards the individual’s 5% total. And a qualifying beneficiary of a settlement cannot include shares (and voting rights) held in the settlement in determining whether he or she holds the 5% necessary for the company to be his or her personal company.

Any voting rights which come into force only in certain circumstances are not `exercisable’ while those circumstances do not exist. For example, preference shares in a company may entitle the shareholder to a vote only if the dividend on these shares was six months in arrear at the date of the company’s annual general meeting. Such votes would not be exercisable if the preference dividend never fell into six months’ arrear.

But the Retirement Relief case of Hepworth v Smith (54TC396) makes it clear that it is not necessary for voting rights actually to be exercised for them to be exercisable. Vinelott J said what one has to look at is the factual question whether voting rights exercisable in general meeting are or are not exercisable by the individual claiming relief.

Ordinary Share Capital

For the purposes of Entrepreneurs’ Relief ‘ordinary share capital’ has the meaning given to it by the Income Tax Acts - see ITA2007/S989 - which says it means all of a company’s issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits.

The CT Structures Team in CT & VAT has technical responsibility for ITA2007/S989 (previously ICTA88/S832 (1). The text of their note setting out HMRC’s guidance on the interpretation of “ordinary share capital” can be found at appendix 11 to this manual.