Over the last year or so, I have come across a few situations where owner-managers have unwittingly invalidated their qualifying entrepreneurs\u2019 relief (ER) status by failing to appreciate the precise requirements of the 5% shareholding test, which has created all sorts of problems on the sale of their company.<\/p>\n
Section 169I, Taxation of Chargeable Gains Act 1992 (TCGA 1992) requires the seller to hold at least both:<\/p>\n
\u2022\tat least 5% of the ordinary shares (which is measured in terms of their \u2018nominal value\u2019) and
\n\u2022\tat least 5% of the voting rights.<\/p>\n
There are no \u2018associate\u2019 rules here, so the 5% must be held by the shareholder in their own right.<\/p>\n
In one particular case, the two main director shareholders had issued 10,000 10p variable rate preference shares to a number of key employees. They failed to indentify that the \u2018preference shares\u2019 \u2013 which carried variable dividend rights \u2013 would be classified as ordinary shares for the purposes of the ER rules. (All shares are ordinary shares except fixed rate preference shares \u2013 see s 989, ITA 2007 (s 169S, TCGA 1992)). The fact that they each continued to hold 50% of the voting power was insufficient by itself.<\/p>\n
It would have been possible to correct the situation for the future, for example, by arranging for an appropriate bonus issue of ordinary shares to the director-shareholders. However, they suddenly received an unexpected \u00a38m offer for the purchase of \u2018their\u2019 company. As things stood, they could not sell their shares with the benefit of ER!<\/p>\n
In real life this ER problem was fortunately resolved with the acquiescence of the purchaser . However, the purchaser wanted to book the acquisition \u2018Day 1\u2019 so it was not possible to use \u2018put and call\u2019 options. Instead, the purchaser created a \u2018bid-company\u2019 (Bidco) which was also structured to be the ‘seller’ director-shareholders’ \u2018personal company\u2019 for ER purposes. They then took their sale consideration in the form of non-qualifying corporate bonds issued by Bidco so they had to wait another 12 months for their money! <\/p>\n
Sometimes, purchasers will not be willing to complicate their acquistion. Owner managers must fully fully understand the wider ER implications of issuing shares to employees and venture capitalists! <\/p>\n","protected":false},"excerpt":{"rendered":"
Over the last year or so, I have come across a few situations where owner-managers have unwittingly invalidated their qualifying entrepreneurs\u2019 relief (ER) status by failing to appreciate the precise requirements of the 5% shareholding test, which has created all … Continue reading