Director A: Held the shares for 5 years which equates to 6% of the ordinary shares in the company.
Director B: Held the share for 14 months which is also 6% of the ordinary shares in the company.
Upon dilution of shares, both shareholders will only end up owning 4.5% of the company.
An individual qualifies for Business Asset Disposal Relief when an individual is making a material disposal of shares or securities of a company. TCGA 1992 S169I(2)(c).
A material disposal is made if conditions A, B, C or D is met. TCGA 1992 S169I(5). We will focus on condition A for the purpose of this question.
Condition A is that the individual is making a disposal from his personal trading company and has either been an officer or an employee for 2 years prior to disposal of the shares. TCGA 1992 S169I(6)(a)(b).
A personal company for an individual is where the shareholder owns at least 5% of the ordinary shares in the company along with additional conditions on those shares which can be found the relevant legislation. TCGA 1992 S 169S(3).
Director A meets all the qualifications for Business Asset Disposal Relief before the dilution, however after the dilution he no longer owns at least 5% of the ordinary shares in the company so will not qualify for BADR should he make an actual disposal of that shareholding the future. Is there anything Director A can do?
Where a company ceases to be an individual’s personal trading company, an election can be made for BADR on the basis the individual would meet all the conditions outlined above. TCGA 1992 S169SC.
If an election is made, Director A is treated as making a notional disposal of shares at that point and reacquiring them at that market value. TCGA 1992 S169SC (4).
An election needs to be made on before the 31 January following the tax year in which the disposal is made. TCGA 1992 S169SG (2).
However, during discussion with Director A he may be concerned of making the election as he has does not have the relevant cash to pay the tax due, therefore missing out on BADR.
An additional election can be made to defer the tax due and be paid when there is an actual disposal of the shares. TCGA 1992 S169SD. An election needs to be made within 4 years after the end of the relevant tax year of disposal. TCGA 1992 S169SG(4).
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