Case: Cumulative preference shares were ordinary share capital

[2019] UKFTT 0268 (TC)

Judge John Brooks

Decision released 24 April 2019

Capital gains tax – entrepreneurs’ relief – whether ‘personal company’ – whether cumulative preference shares ‘ordinary share capital’ – whether right to dividend at a fixed rate – appeal allowed

Warshaw [2019] TC 07107

Summary

Mr Warsaw sold his shareholding in Cambridge Education Holdings 1 Jersey Ltd (the Company) in December 2013. The holding comprised ordinary shares, preference shares and B ordinary shares. If the preference shares were taken into account the holding represented 5.777% of ordinary share capital (therefore sufficient to satisfy the entrepreneurs’ relief personal company condition), but without the preference shares the holding was only 3.3%. It was agreed by both parties that the other necessary conditions for entrepreneurs’ relief were satisfied. The preference shares carried a right to a fixed cumulative preferential dividend (the preference dividend) at a rate of 10% per annum on the amount subscribed. However, if the preference dividend was not paid annually on the due date, the outstanding amount was to be compounded and future dividends were to be paid at 10% on the aggregate of the subscription price and the amount compounded.

On behalf of HMRC it was argued that the preference shares did not form part of ordinary share capital as the definition in ITA 2007, s. 989 specifically excluded ‘capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits’ and in this case the dividend rate was fixed at 10%, even if the amount on which it was calculated varied.

The FTT preferred the appellant’s argument that (following Tilcon v Holland (1979-1983) 54 TC 464), both the percentage and the amount to which it was applied had to be taken into account to identify the rate. As the amount to which the 10% was to be applied could vary, the rate was not ‘fixed’. (In support of this view, the judge gave as an example shares that paid a dividend at a specified rate on profits which would, applying HMRC’s analysis, not be ordinary shares). The preference shares did therefore fall to be treated as ordinary shares and Mr Warsaw’s appeal was allowed.

Comment

Since entrepreneurs’ relief was introduced in 2008, the majority of appeals have concerned the meaning of ‘ordinary share capital’ for the purposes of the personal company definition – this case provides a further contribution to that debate.

For commentary on the meaning of ‘personal company’, see In-Depth at ¶572-650.

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