Entrepreneurs' Relief – 5% Test and Preference Shares

Entrepreneurs’ relief is available to reduce the rate of capital gains tax to 10% on the sale of “qualifying business assets” and is therefore an important relief for many business owners.
In order to qualify for Entrepreneurs’ relief on a disposal of shares in a trading company, in the 12 months prior to the disposal the shareholder must:

  1. hold at least of 5% of the company’s ordinary share capital and voting rights, and
  2. be an employee/director of the company

In terms of the first condition, ordinary share capital is defined as all share capital excluding fixed rate preference shares.   Therefore it is considered that preference shares that are not fixed rate must be included in the total share capital when calculating a shareholder’s percentage of share capital.
It is important to consider the existence of preference shares which could dilute a shareholding below the 5% threshold.
Where a company is considering issuing preference shares, care should be taken to ensure that the conditions for entrepreneurs’ relief are not inadvertently breached.
Contact Eaves & Co on 0113 2384030 for an initial no-obligation discussion.