It's All in the Timing
Selling the shares in a business you own and run attracts very favourable tax treatment in the UK and one of the most beneficial reliefs is Entrepreneurs' Relief (ER), which for most small businesses limits the Capital Gains Tax payable by the director-shareholders to 10 per cent as opposed to the usual rate of 18 or 28 per cent (being reduced to 10 or 20 per cent following the recent Budget).
ER is a relatively easy relief to get. The main criteria for a director-shareholder of a trading company are that at the time of sale the vendor must own at least 5 per cent of the shares and voting rights of the company (or have the option to buy them and have been an employee or office holder of it).
As is usual, however, HM Revenue and Customs (HMRC) interpret the rules very strictly, as evidenced by their approach to a claim for ER made by a director of a company who fell out with his fellow directors, resigned his position as a director and, as part of the arrangements over his departure, entered into an agreement whereby the company undertook a 'purchase of own shares'.
The departing director then claimed ER on his capital gain and HMRC denied it, for the simple reason that he was not an employee of the company when the shares were bought back by the company.
His argument that the deal to sell his shares was done as part of the negotiations surrounding his leaving the company was rejected – even though a purchase of own shares requires a clearance from HMRC.
In two similar cases, taxpayers have been successful in persuading the tax tribunals that they were 'officers' of a company – and thus qualified for ER – after they had ceased being employees. However, in this case, the facts were straightforward and the claim was denied on appeal.