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Entrepreneurs鈥� Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.

TCGA92/S169S(3)

A company will be an individual鈥檚 鈥減ersonal company鈥� if the individual

• holds at least 5% of the ordinary share capital of the company, and
• that holding gives them at least 5% of the voting rights in the company

Where a disposal is made on or after 29 October 2018, there is a further requirement that the individual has a sufficient economic interest in the company. TCGA92/S169S(3)(c) requires one of the following conditions to be met:

1. Condition (i) is that the holding would entitle the individual to at least 5% of the profits available for distribution and would entitle the individual to at least 5% of the company鈥檚 assets on a winding up. These are the based on the amounts available to 鈥渆quity holders鈥� as defined in CTA10/S158. 鈥淓quity鈥� has a wider meaning than 鈥渟hares鈥�. Or
2. Condition (ii) is that the individual would be entitled to at least 5% of the proceeds of a disposal of the whole of the ordinary share capital of the company.

These are referred to as conditions (i) and (ii) here and at CG64051.

Either or both of these conditions must be met when the company in which the shares are held is required to qualify as the individual鈥檚 personal company. For straightforward share disposals the requirement will need to be met in the period leading up to the disposal in question, which is one year for disposals made before 6 April 2019 and two years for disposals made on or after that date.

Condition (i) should apply for companies with a single class of issued shares that gives each holder the same rights. Condition (ii) should be considered first in other cases. These conditions and the anti-avoidance rule that applies to condition (ii) are considered in detail on page CG64051.

TCGA92/S169S(3C)

Where two or more persons hold shares jointly, each person is to be treated as the sole holder of so many of the shares that is proportionate to the value of that person鈥檚 share. For example, where spouses or civil partners own a joint 100% shareholding equally, they are treated as each holding 50% of the shares, 50% of the voting power and an entitlement to 50% of the proceeds on disposal of the whole of the ordinary share capital.

Note, however, that shares held, or voting rights which an individual may be able to exercise, in the capacity of a trustee of a settlement cannot be counted towards the individual鈥檚 5% total held in his or her personal capacity. Similarly, a qualifying beneficiary of a settlement cannot include shares (and voting rights) held in the settlement in determining whether they hold the 5% necessary for the company to be their 鈥減ersonal company鈥�.

Any voting rights which come into force only in certain circumstances are not 鈥榚xercisable鈥� 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鈥檚 annual general meeting. Such votes would not be exercisable if the preference dividend never fell into six months鈥� 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 Business Asset Disposal Relief 鈥渙rdinary share capital鈥� has the meaning given by the Income Tax Acts. ITA2007/S989 says it means all of a company鈥檚 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鈥檚 profits.

On the authority of Canada Safeway Ltd v IRC (73TC374) it is the nominal value of the ordinary shares rather than the number of ordinary shares that have been issued or the amount subscribed for those shares that must be taken into account for the purposes of ITA2007/S989. The CT Structure Team in BAI has technical responsibility for ITA2007/S989 (previously ICTA88/S832(1)).

HMRC guidance on the meaning of 鈥渙rdinary share capital鈥� can be found in the Company Taxation Manual at pages CTM00511 to 00516.

Note that CTA10/S160 contains the definition of 鈥渙rdinary shares鈥� which is different to 鈥渙rdinary share capital鈥�. Both definitions are relevant for the economic interest 鈥渃ondition (i)鈥� referred to above and at CG64051, TCGA92/S169S(3)(c)(i).