December 19, 2018


There have been a number of changes over the past few years, which have not helped those trying to determine the tax rate which will apply to the capital gain generated on selling their shares. This article looks to provide a little clarity and focuses on trading companies, not those with predominantly investment activities.

The current capital gains tax rates associated with shares are, 10% for basic rate taxpayers and 20% for those capital gains exceeding the higher rate threshold.

Entrepreneurs’ Relief

The successor to Business Asset Taper Relief, this 10% tax rate has now been around for over a decade.

Key conditions

Throughout the 1 year ending with the date of disposal, the shareholder:

  • Owns at least 5% of the issued ordinary share capital (this is based on the nominal value), which also attracts 5% of the voting rights by virtue of the shareholding;
  • Is also either an officer (e.g. director) or employee of the company/group companies, and;
  • The company is either a trading company or holding company of a trading group.

If these conditions are met during the year up to the cessation of trade, the shareholder has three years in which to sell (or liquidate) the company.

I won’t go into the ins and outs of what a trading company or group is here, but if there is uncertainty HMRC’s non-statutory clearance process can provide comfort in this respect.

The availability of this tax rate is also subject to a lifetime allowance of £10 million.

At first glance this seems relatively straight forward, but what is ordinary share capital?

Ordinary share capital includes all issued share capital other than those which have a right to a dividend at a fixed rate, but have no other right to share in the company's profits. To expand this, last year a case went through the courts which determined that shares which have no right to a dividend, do not fall within this definition and are therefore considered to be ordinary!


From 6 April 2013, EMI option holders have been provided the opportunity to claim this tax rate even where the individual does not hold the necessary 5% ordinary share capital. The officer/employee and trading company conditions must still be met in the year up to sale and the date the option was granted must be at least one year prior to the exercise of the option/sale of the shares.

Finance Act 2015 provided the ability for qualifying gains to be deferred using EIS/SITR investments, whilst retaining the availability of entrepreneurs’ relief once the capital gain comes back into charge.

Finance Act 2016 delivered (retrospective) changes to the trading activities definition, in particular with respect to corporate partnership and joint venture interests.

The recent Budget 2018 brought four further considerations in relation to shares (which are yet to be enacted):

  • From 29th October 2018 the 5% of ordinary share capital condition is extended to require 5% beneficial entitlement of the distributable profits and net assets available for distribution to equity holders by virtue of the shareholding (equity holders being ordinary shareholders and uncommercial loan creditors) or in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds..
  • Post 5 April 2019 the ownership condition to be met, must be over a 24 month period rather than 12.
  • From 6 April 2019, those who meet the personal service company definition will be able to bank entrepreneurs’ relief on a shareholding, shortly before their interest falls below the 5% threshold (potentially helpful for founder shareholders who are seeking a significant number of external investors).
  • For those looking to incorporate their business, they may be able to benefit from the previous business ownership period when considering the 24 month test, for shares sold on or after 6 April 2019.

Should you have entered into an agreement to sell your shares (post 5 April 2016) in return for shares and loan notes in a new company (deferring a claim for entrepreneurs’ relief), you may still be able to elect to bring forward the tax charge, should entrepreneurs’ relief no longer be in point as a result of these additional requirements.

Investors’ Relief

An alternative to entrepreneurs’ relief is investors’ relief, which was introduced from April 2016. This provides the ability to claim a 10% tax rate on relevant capital gains, and like entrepreneurs’ relief is restricted to a lifetime allowance of £10 million.

The basic requirements in order to qualify include:

  • The individual (or their spouse) must have subscribed for the ordinary shares >16 March 2016 (not acquired from another shareholder), paying for them in cash at the time of the share issue.
  • The shares have been held continuously for at least three years.
  • The individual nor anyone connected with them are an employee or officer of the company (there are exceptions for unremunerated directors and also once a 180 day post investment period has passed, so long as there was no prospect from outset).
  • A bit like EIS relief a period of restriction applies, where the qualifying nature of the shares could be tainted (and the relief lost).
  • Again this is aimed at trading private companies, not investment or listed.

Claims need to be made in order to benefit from either relief.

As usual, the devil is in the detail. If you have any doubt as to the availability of either entrepreneurs’ or investors’ relief on the shares you hold, please get in touch with a member of the AG tax team.


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