Using growth shares to qualify for Entrepreneurs Relief
If you qualify for Entrepreneurs Relief you pay capital gains tax at 10% on the first £10 million of lifetime gains. With the top CGT rate at 28%, the 18% differential is now worth up to £1,800,000.
Conditions to qualify
Where you're looking at a disposal of shares by an individual, the legislation states that for a period of one year prior to disposal:
It's therefore crucial that the company is your "personal company". A company is an individual's personal company if:
These conditions are not straightforward to meet. In particular the requirement for an individual to hold at least 5% of the voting rights can be a problem.
However, as the 5% test does not relate to the economic rights attaching to the shares it is possible to create special classes of shares with economic rights of less than 5% which are structured so as to satisfy the tests.
You could therefore have a situation where there is a venture capital backed company with the venture investor holding, say over 95% of the voting rights in the company and several classes of preference shares. It could be possible (with some good negotiation) to get the investor to agree to the dilution of its voting rights to 90% to allow (for example) two key members of the management team to qualify for Entrepreneurs Relief (as they would then meet the 5% requirement).
You could therefore create two classes of growth shares with entrenched voting rights of 5% per class. The growth shares would be entitled to a specified percentage of exit consideration achieved above a threshold.
The 5% by nominal value test requires a careful analysis of what constitutes "ordinary share capital". It may well be that the preference shares would not be ordinary share capital for these purposes if they were only entitled to dividends at a fixed rate. This would then allow you to set the nominal value of the two classes of voting shares at a low level so you would not have to pay much cash to subscribe for the shares.
By structuring the arrangement using growth shares you can then argue the up front value is no more than par to avoid an income tax charge on the acquisition of the shares.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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Disclaimer
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