What a Difference 0.01 Per Cent Makes

Precision is important, as a recent tax case shows.

It involved a claim for entrepreneur's relief (ER) by a businessman who had sold his shares in his company. The practical effect of a successful claim for ER is that the rate of Capital Gains Tax (CGT) that applies on the sale of qualifying shares is reduced from 28 per cent to 10 per cent. (Note: CGT rates are due to change substantially when the Finance Bill is enacted later this year.) The availability of ER depends on several criteria, one of which is that the person selling the shares must own 5 per cent or more of the 'ordinary share capital' of the company.

The businessman met all the necessary criteria except that one. When his shareholding was calculated, it came to 4.99 per cent of the company's share capital, because additional 'deferred' shares had been issued which had fractionally diluted his shareholding.

The main argument was over whether or not the deferred shares counted as part of the company's ordinary share capital under the legislation. If they did not, he would have had a 5 per cent shareholding and been entitled to ER.

The deferred shares had no voting or dividend rights, but they did carry the right to be redeemed at par once another class of share capital ('B' shares) had been redeemed. It may at first glance seem that these were not 'ordinary shares', but the relevant legislation (in the Income Tax Act 2007) stipulates that ordinary shares are 'the 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 rights attached to the deferred shares meant that they clearly met the definition of 'ordinary share capital'. Accordingly, HM Revenue and Customs refused the businessman's claim for ER and the First-tier Tribunal agreed with them – adding nearly £130,000 to his tax bill.