Deferred shares and Entrepreneurs’ Relief

There’s an old saying about London buses. You wait a while and then …

Following on from our recent Tax Bite, “Less haste, more Entrepreneurs’ Relief”, we write to report yet another sorry tale of Entrepreneurs’ Relief woe.


Alan Castledine was a founder shareholder of Park Resorts, one of the UK’s largest operators of caravan parks. In 2007 Mr Castledine retired, and the company was taken over by Dome Holdings Ltd (‘DHL’) for a mixture of cash and loan notes. In his absence, however, the business failed to prosper, resulting in Mr Castledine being called back a year later. The turnaround was successful, but it required a restructuring of the group’s finances, in which Mr Castledine was allocated 5% of the ordinary share capital.

Between July 2011 and July 2012 Mr Castledine disposed of his loan notes, giving rise to capital gains. However, he claimed Entrepreneurs’ Relief on the basis that he also held 5% of the ordinary share capital (as required by the legislation).

HMRC enquiry

HMRC enquired into the matter. On inspection of the company’s share register they noted that, whilst Mr Castledine held exactly 5% of the ordinary ‘A’ and ‘B’ shares in the company, there was also a third class of “deferred shares” in existence. If these shares also formed part of the “ordinary share capital” then Mr Castledine’s shares would only equate to a 4.99% shareholding.

The deferred shares were created as a mechanism for removing ordinary ‘B’ shares from senior managers of DHL on their departure. This was apparently done on the back of legal advice to avoid potential problems associated with other mechanisms, such as a buyback of shares. The deferred shares had no voting rights or rights to dividends, and only had a right to redemption at par if £1 million had been paid out on every B share (which, given there were 20 million ‘B’ shares would never conceivably happen!). In other words, they were worthless and had largely been forgotten about.

Tribunal decision

The matter came before the First Tier Tribunal in January 2016 (Alan Castledine v HMRC – TC 04930).

Counsel for the taxpayer argued that the statute should not be interpreted literally, as it would be absurd for Parliament to intend to categorise as ordinary shares holdings which had none of the characteristics of an ordinary share, or even of a preference share, and were shares only in name. Unfortunately, the judge, while sympathetic to the commercial reasons for creating the deferred shares, was unable to agree that they were anything but ordinary shares on a plain reading of the legislation. The Entrepreneurs’ Relief conditions were therefore not met, resulting in the gain being taxable at the main 28% rate of CGT.

What lessons can be learned?

This case once again demonstrates the importance of carefully considering the Entrepreneurs’ Relief conditions. While these are simple tests to satisfy, they are also easy to fail! This is the type of situation when it would probably have been possible to approach HMRC for advance assurance under the non-statutory business clearance procedure. Assuming they would have rejected it, then a solution might have been to issue Mr Castledine with worthless deferred shares of his own to take him over the 5% threshold!

On a positive note this case will make it difficult for HMRC to attack the effectiveness of ‘worthless’ shares being used to bump individuals up to a 5% nominal shareholding so as to ensure that they qualify for Entrepreneurs’ Relief.




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