For history buffs, the Battle of Bosworth was the last significant battle of the War of the Roses, marking the beginning of the Tudor period of monarchy. It is also the inspiration for that childhood mnemonic for remembering the colours of the rainbow “Richard of York gave battle in vain”. Richard III was, of course, the last English monarch to die on the battlefield.
Sadly, the recent tribunal case of Guy Holland-Bosworth v HMRC tells another sorry tale of an individual who battled in vain (albeit with less fatal consequences).
Mr Holland-Bosworth held a 50% shareholding in a trading company. In 2007 he sold just over 90% of his shares, leaving him with 4.6% of the company, although a subsequent bonus issue in 2013 took these back up to 5%. Around the same time as the 2007 transaction his retained shares were redesignated into a separate ‘B’ class that had no voting rights. In December 2014 the shares were sold for £1.35 million and the taxpayer claimed Entrepreneurs’ Relief (‘ER’).
Those who are familiar with the ER rules will instantly spot the problem. Whilst Mr Holland-Bosworth had the required 5% holding of ordinary shares, the ER rules also require those shares to carry 5% of the voting rights. The company’s Articles were clear that the B shares had no voting rights. HMRC therefore rejected the claim for ER, and assessed the taxpayer to the ordinary 20% rate of capital gains tax on the gain.
Mr Holland-Bosworth appealed to the Tribunal arguing amongst other things that:
a. The other shareholder would have agreed to amend the Articles to ensure that Mr Holland-Bosworth could meet the ER criteria; and
b. The Articles included an “alteration of abrogation” clause which meant that the B shareholder had the right to vote on changes to the rights attached to their own class of shares.
Unsurprisingly, the Tribunal judge was not persuaded by these arguments. It is well-accepted that voting rights, in this context, means those exercisable in a general meeting against the company, not merely against other shareholders of the same class. As for Mr Holland-Bosworth’s point that the other shareholder would have agreed to amend the Articles, this simply was not borne out by the evidence. Accordingly, the appeal was dismissed.
The Tribunal decision does not cover the full background to why this mistake was made, and we can only speculate that the taxpayer either failed to take advice, or that an adviser failed to spot the problem with the Articles. Clearly there had been some awareness of the ER rules given the bonus issue that took place in 2013; although, it is worth mentioning that under the current legislation relating to ER (or ‘Business Asset Disposal Relief’ as it is now known) the bonus issue would have been too late, as the conditions now have to be met for a full two years prior to disposal.
Whilst the relief has now been limited to £1 million of lifetime gains it is typically these small, 5% shareholders for whom meeting the qualifying conditions remains highly important. Shareholders looking to sell need to review their Articles well in advance!
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