A recent case before the tax tribunal has confirmed that all of a company’s shares are ordinary shares except those that carry a fixed rate of return.

This is crucial as CGT business asset disposal (BAD) relief requires a shareholder to be entitled to at least 5% of a company’s ordinary share capital in addition to being an officer or employee of the company, and for the company to be a trading company or the holding company of a trading group.

These conditions need to be satisfied throughout the 24 months before the disposal of the shares. This two-year rule is essential if you are considering transferring some of your shares to other family members now that only the first £1 million qualifies for CGT BADR.

Several conditions need to be satisfied by the shareholding in addition to the 5% ordinary share capital test. The shareholder must have 5% or more voting control and be entitled to 5% or more of the company’s distributable profits, and of its assets should the company be wound up. Those final two conditions do not need to be satisfied where the shareholder would be entitled to receive at least 5% of the proceeds on the hypothetical sale of the whole company.

This tends to be a problem area where a company has a number of different classes of shares. If that is the case, please contact us to check the eligibility of different shareholders.