ER has been available since 2008 and the general rules are well known. The basic idea of the relief is that for qualifying disposals Capital Gains Tax will only be charged at 10% on gains of up to £10 million.
In the context of a shareholder in a company ER is available on a disposal of shares where throughout the period of one year ending with the date of disposal:
- The company is the individual’s personal trading company and is either a trading company or the holding company of a trading group, and
- The individual is an officer or employee of the company or one or more companies which are members of the trading group
A personal company is where the individual owns at least 5% of the ordinary share capital representing at least 5% of the voting rights.
HMRC guidance states that in determining whether an individual is an officer or employee of the company depends on whether that person has an employment or holds an office. There are no specific requirements regarding the working hours or level of remuneration. The condition is simply that the individual should be an officer or employee.
In a recent Tribunal case an individual’s claim for ER was denied by HMRC on the basis that they were not an employee at the date the shares had been disposed of. She had previously been an employee and had been on the payroll but was removed from the payroll prior to a sale to a third party. However, she continued to carry out the same duties as before and her argument was that her salary was effectively paid to her husband who continued as a director in the company.
The Tribunal accepted that the motivation for removing her from the payroll was to keep her out of sight of the potential purchaser because of their sensitivity to the employment of spouses of senior executives. They further accepted that her salary had been paid to her husband and allowed a claim. In this case then, a successful outcome but the issue of ensuring their evidence of employment appears to be an area HMRC may want to identify.
As this is such a valuable relief overall attention to detail is vital. Contact us for further advice on this area if you have any concerns.