On 1 March 2016, the First-tier Tribunal in Castledine v HMRC10 held that a director who held only 4.99% of a company’s ordinary share capital, taking into account deferred shares, did not qualify for capital gains tax entrepreneurs’ relief.

The deferred shares in question had no voting rights and no dividend entitlement. They also carried no realistic expectation (on the particular facts in issue) of a right to distribution on winding up of the company. However, the Tribunal held that due to the wide definition of “ordinary share capital” for the purposes of the entrepreneurs’ relief legislation – namely all of the issued share capital, however described, other than capital carrying a fixed rate dividend right – the deferred shares had to be taken into account in calculating the taxpayer’s holding. The Tribunal also noted that the legislation requires the taxpayer to hold “at least” 5% of the ordinary share capital, affording no discretion for “almost” 5% ordinary shareholders.

The Tribunal was not willing to entertain the taxpayer’s argument that a purposive approach should be applied to the definition to exclude such “worthless” shares. Rather, the Tribunal agreed with HMRC that the intention behind the requirement for relief was to provide for a simple, unambiguous threshold (of exactly 5% of ordinary share capital) that must be reached before entrepreneurs’ relief will be available.

The decision can be viewed here.