Tribunal finds that deferred shares are ordinary shares for the purposes of entrepreneurs' relief

28 April 2016

In Alan Castledine v HMRC [2016] UKFTT 145, the First-tier Tribunal (FTT) dismissed Mr Castledine's appeal and found that deferred shares qualified as ordinary shares for the purposes of entrepreneurs' relief.


Mr Castledine claimed entrepreneurs' relief for the years 2011/12 and 2012/13, in respect of the disposal of loan notes in Dome Holding Limited (DHL). The only issue between the parties was whether the test for eligibility for such relief in section 169S, Taxation of Chargeable Gains Act 1992 (TCGA) (at least 5% of the ordinary share capital held by the individual), had been satisfied.

The issued share capital of DHL at the relevant time included both ordinary shares and deferred shares.

If the deferred shares were counted as ordinary shares, Mr Castledine would hold 4.99% of the ordinary share capital of DHL and would not qualify for entrepreneurs' relief. However, if the deferred shares were excluded, Mr Castledine would hold 5 per cent of the company's share capital and would qualify for entrepreneurs' relief.

On 29 July 2011 and 31 July 2012, Mr Castledine disposed of his loan notes for £600,303 and £505,009, respectively. This gave rise to chargeable gains. Mr Castledine's claim for entrepreneurs' relied was rejected and he appealed to the FTT. 

FTT's decision

Under DHL's articles of association, the deferred shares had neither voting rights nor rights to dividends. They could only be redeemed at par on capital realisation after at least £1 million had been distributed in respect of each ordinary B share. As there were at the relevant time 2,001,985 B shares in issue, Mr Castledine argued that the deferred shares had in reality no rights.

The FTT noted that the class of deferred shares was created for commercial reasons. It was a way of removing the ordinary B shares from senior management of DHL when they left the company and taking away any influence they might otherwise have over the running of the company. Under DHL's articles, ordinary B shares are automatically converted into deferred shares in the case of certain 'conversion events', including the holder leaving the employment of the company.

Mr Castledine submitted that Parliament did not intend to categorise as ordinary shares holdings which had none of the characteristics of an ordinary share. The FTT was referred to the definition of 'shares' contained in section 540, Companies Act 2006, which provides that share means a "share in the company's capital". This implies that there must be a quantifiable sum of money related to each share which entitles the holder to certain rights. In this case, the deferred shares deliberately did not entitle the holder to any rights and were shares in name only.

HMRC argued that the legislation was unambiguous and clear. The legislation defined an easily applied dividing line giving rise to no uncertainty. Accordingly, there was no need and no justification for the FTT to go beyond the plain words of the statute.

The FTT concluded that the intention of Parliament was to give the term 'ordinary share capital' a wide interpretation. This was clear from the broad definition provided in section 989, Income Tax Act 2007 (ITA), by the words in parenthesis 'however described'.

Whilst acknowledging that the arguments were finely balanced, the FTT felt it was unable to depart from the plain language of the legislation under consideration and concluded that the deferred shares fell within the meaning of 'ordinary share capital' in section 989, ITA. Mr Castledine's appeal was therefore dismissed.


Mr Castledine will no doubt be very disappointed by this decision. As a result of the interpretation of the legislation preferred by the FTT, he has failed to qualify for entrepreneurs' relief due to holding 0.01% too little of the company's share capital.

It is also interesting to note that in this instance, HMRC was content to argue that there was no need for the FTT to go beyond the plain wording in the statute. Of course, when taxpayers argue that the plain wording of a statute should be followed, HMRC often contends that a purposive approach to statutory construction should be adopted. A degree of consistency from HMRC in this regard would be welcome.

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