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Case law: Uncertainty whether shares with no dividend rights mean no entrepreneurs' relief tax saving

Company directors and employees holding shares in their company with no dividend rights face uncertainty over whether they can take advantage of tax savings under the Entrepreneurs' Relief scheme, following inconsistent legal decisions.

Legal Alert

This update was published in Legal Alert - September 2016

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Please note: A newer article on this case was published in the November 2017 edition of Legal Alert following subsequent developments in the legal process.

Entrepreneurs' Relief significantly reduces the Capital Gains Tax payable by individual directors and employees on a 'material disposal' (or a disposal 'associated' with a material disposal) of their 'qualifying' company shares, provided certain conditions are met. The relief also applies if they meet these conditions in relation to a holding company of a trading group.

One of the conditions is that the director or employee must hold at least five per cent of the ordinary shares and voting rights in their company. Ordinary shares means 'all the company's issued share capital (howsoever described), other than capital the holders of which have a right to a dividend at a fixed rate but no other right to share in the company's profits'.

There have been two recent rulings on the applicability of the relief in cases where non-voting, redeemable company shares carried no rights to a dividend. The holders of those shares merely received their money back if the shares were redeemed.

In one case, the Upper Tier Tribunal (UTT) ruled that the shares did not have a right to a dividend at a fixed rate. It therefore counted as ordinary shares when calculating whether an individual held five per cent of the company's ordinary share capital.

However, in the other case the UTT ruled that shares with no right to a dividend were shares with a right to a dividend at a fixed rate - the fixed rate was zero. The shares with no entitlement to dividend were therefore not part of the ordinary share capital of the company.

These decisions create uncertainty as to whether or not shares with no right to any dividend will count as ordinary shares. Directors and employees holding such shares are strongly recommended to take professional advice.

Operative date

  • Now


  • Company directors and employees holding shares in their company which have no dividend rights, and who plan to use the Entrepreneurs' Relief scheme to save tax when they sell their shares, should take legal advice on their eligibility for the relief - and potential solutions if they are not

Case ref: Castledine v HMRC [2016] UKFTT 145 (TC) / McQuillan v HMRC [2016] UK FTT 305 (TC)

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.