Timing errors can lead to the loss of entrepreneurs’ relief, as Rebecca Cave explains.
When a director steps down from a company he has owned and run, perhaps as part of a planned succession or to resolve a dispute, the individual will normally also dispose of their shares in the company. If the resignation occurs before the share disposal there is a risk that entrepreneurs’ relief will be denied, and CGT will be payable at 28% instead of at 10%.
Entrepreneurs’ relief is only due on gains arising from the disposal of shares if the shareholder has been an employee or officer of the company for a period of at least 12 months ending with the date of disposal. If the director resigns his position before he sells his shares that 12 months period to date of disposal is broken, so in most cases entrepreneurs’ relief is not due. This was illustrated in the case of John K Moore v HMRC (TC04903).
Moore was one of the founding shareholders and directors of Alpha Micro Components Ltd, and held 30% of the shares. In early 2009 there was dispute between the directors of that company and Moore agreed to resign as director. The terms of his departure, including the arrangements for the purchase of his shares, were agreed at a general meeting of the company on 29 May 2009. His compromise agreement with the company stated that he ceased to be a director and his formal employment ceased on 28 February 2009.
At the first-tier tax tribunal Moore argued that there was an unconditional contract for the sale of the shares on 28 February 2009. This story didn’t wash with the tribunal as the Companies House annual return for Alpha Micros made up to 6 April 2009 reported that Moore held 3,000 shares on that date, and crucially that he was no longer a director. The claim for entrepreneurs’ relief was denied.
This mis-timing of resignation as a director and the share sale can be resolved if the individual retains a relationship with the company such that he is treated as an employee of the company until the date of disposal. This was demonstrated in Richard Hirst v HMRC (TC04038).
Hirst had resigned as a director of the company about 18 months before he sold his shares, but he continued to undertake work for the company in that period. Although he did not receive a salary the company provided him with a laptop and paid for an internet connection at his home. The tribunal found that there was an employment relationship between Hirst and the company, and Hirst’s claim for entrepreneurs’ relief was upheld.