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Court case changes the rules

Business owners and passive investors across Shropshire need to review their share structures following a recent court case.

Francesca Hutcheson says it is vital for firms to keep their share structure under review but even more so following the latest legal decision.

“The case confirmed that certain types of preference shares can now form part of a company’s ordinary share capital for tax purposes and this could have important tax implications for investors.

Francesca explains that preference shares are generally issued to investors as a way of raising capital without diluting value for the ordinary shareholders, and they often carried a fixed rate of dividend which is paid out ahead of any returns on other classes of shares.

“When it comes to selling shares in a trading business, Business Asset Disposal Relief – which was previously known as Entrepreneurs’ Relief – offers a reduced rate of 10% Capital Gains Tax up to a lifetime limit of £1 million of gains, as long as certain conditions are met.

 

“One of those conditions is that the person disposing of the shares must hold at least 5% of the company’s ordinary share capital – this would generally mean all of the company’s share capital other than shares with a fixed rate of dividend.”

 

Francesca says that the decision in the latest court case had held that fixed, cumulative, and compounding preference shares will now also form part of the ordinary share capital.

 

“This is good news for anyone who holds these shares as they may be able to benefit from a lower rate of tax on disposal – but equally it could be bad news for owner-managers who may find their share is diluted below the critical 5% level as a result of this decision.

 

“So it’s crucial that you regularly review your company’s corporate share structure so that you clearly understand which shares form part of the ordinary share capital and which do not.

 

“You may be able to adjust the balance to improve your tax position, but be aware there could be a delay before any changes are effective for Capital Gains Tax purposes.

 

“If you’re unsure of where you stand when it comes to shares and tax responsibilities, seek professional advice to make sure you’re utilising all the options available to you.”

 

 

Francesca Hutcheson, Tax Director

 

The Author

Mel Edwards

Mel Edwards

Marketing Assistant

Mel joined Dyke Yaxley in May 2017 as a Marketing Assistant after spending 2 years as an Administrations and Marketing Manager for a local Shrewsbury healthcare agency...