An ER lifeboat: past loss of trading status
David Whiscombe highlights an anomaly that may occasionally be vital.
Entrepreneurs’ relief is a very valuable relief, reducing the rate of Capital Gains Tax to 10% where it applies.
Availability of the relief is subject to a number of conditions. In relation to a disposal of shares in or securities of a company, one of these conditions is that the person disposing of the shares should be an “officer or employee” of the company. (The fact, by the way, that it is not necessary that the office or employment should require the devotion of a minimum number of hours to the work can sometimes be helpful in finding a way to gain access to the relief: but we digress.)
It’s necessary that the office or employment should have been held throughout a qualifying period (which since 6 April 2019 has been two years), usually ending on the date on which the disposal of the shares or securities is made. It’s a well-known trap that resigning your directorship or leaving your employment before you sell your shares is for this reason a Thoroughly Bad Idea. Another of the requirements is that for relief to be due, the company in question must also have been either a trading company or the holding company of a trading group (a “qualifying company”) throughout that same qualifying period.
However, there is a special rule that applies where a company that was previously a qualifying company has lost its qualifying status on a date falling less than three years before the disposal. In that case, the “qualifying period” (by reference to which the conditions must be fulfilled) ends on that earlier date rather than at the time of disposal.
The counter-intuitive result is that in some circumstances, it may be desirable to argue if possible that the company had lost its qualifying status before the date on which the shares are sold.
This situation will arise where a shareholder was previously an officer or employee but has ceased to be so by the time the shares are sold. Entrepreneurs’ relief will not be due in respect of the disposal unless it is possible to show that the company lost its qualifying status at some earlier date (falling within three years of the date of disposal) at which time the shareholder was still an officer or employee. It’s a question of fact. Usually it will not be possible: but where all else fails it may occasionally save the day.
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