Entrepreneurs' Relief Available on Shares Sold to Own Company

A taxpayer has successfully argued before the First-tier Tribunal (FTT) that a company's purchase of shares he owned in it was wholly or mainly for the purpose of benefiting its trade under Section 1033 of the Corporation Tax Act 2010. The consideration he received for the shares was therefore taxable as a capital gain rather than a distribution, meaning that he could claim Entrepreneur's Relief.

The taxpayer and two other individuals had undertaken a management buy-out of a training business in 1993. Many years later, following disputes within the company's management, it was decided that the taxpayer would retire to allow his son to pursue a new management strategy. It was proposed that he would give 38 of his 50 shares to his son and four to his grandchildren, and sell eight shares back to the company. The company purchased the eight shares for £4.8 million and cancelled them.

HM Revenue and Customs (HMRC) subsequently opened an enquiry into the taxpayer's return for the relevant tax year, and eventually issued a closure notice amending the return to treat the sale as a distribution, rather than a capital gain on which Entrepreneur's Relief (now known as Business Asset Disposal Relief) could be claimed. The effect of the amendment was to increase the taxpayer's tax liability by more than £1 million. The taxpayer appealed to the FTT.

The FTT accepted the son's evidence that although the company had been profitable, that was not sustainable without continued investment and the taxpayer had blocked proposals for such investment. It therefore found that the taxpayer's retirement and relinquishing control was intended to benefit the business by enabling investments to be made and resolving management-level disputes and tensions. The taxpayer's exit had thus been for the benefit of the trade.

The FTT rejected HMRC's contention that the purchase should be considered separately from the gift of shares to the taxpayer's son. There was nothing in the wording of Section 1033 that precluded the trade benefit purpose being achieved by the purchase of the shares together with other actions. The FTT accepted that the taxpayer would not have gifted shares to his son without the share purchase also taking place. He would therefore not have retired from the business unless the share purchase occurred, and the company had known this. The evidence was clear that the share purchase had been undertaken in order to remove him from the business.

The FTT did not consider that the agreed price was intended by the company to provide any non-trade benefit. The price was arrived at following negotiation and the board had believed that it was the price required to obtain the taxpayer's agreement to sell his shares. The appeal was allowed.