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Within the provisions?

02 October 2000
Issue: 3777 / Categories:
Could readers advise if there is a capital gains tax retirement relief claim possible for my client in relation to a disposal of shares in J Ltd in February 2000. The relevant details are:

(1) Mr H, now aged 57, was a full-time working director from 1978 until April 1995. From that time he continued to work for the company in a part-time capacity but will have worked (on average) more than 10 hours per week until February 2000, although he resigned as a director in November 1999.
(2) His percentage shareholding of the voting shares has been as follows:
Could readers advise if there is a capital gains tax retirement relief claim possible for my client in relation to a disposal of shares in J Ltd in February 2000. The relevant details are:

(1) Mr H, now aged 57, was a full-time working director from 1978 until April 1995. From that time he continued to work for the company in a part-time capacity but will have worked (on average) more than 10 hours per week until February 2000, although he resigned as a director in November 1999.
(2) His percentage shareholding of the voting shares has been as follows:

Up until September 1993 50%
September 1993 reduced to 45%
March 1994 reduced to 40%
May 1994 reduced to 30%
June 1994 reduced to 10%

(3) In June 1994 Mrs H owned 40 per cent of the voting shares in J Ltd.
(4) Thereafter, many outside investors became shareholders so that by the time of the share sale (which comprised part only of his shares) Mr H held 1.94 per cent of the issued voting shares with Mrs H holding 7.33 per cent of the issued voting shares.
(Query T15,687) Skateboard.


I do not believe that Mr H does qualify for retirement relief in respect of the disposal of shares in February 2000. In cases like this, there is no substitute for a close scrutiny of the relevant legislation. Here, we must dissect section 163, Taxation of Chargeable Gains Act 1992 carefully.
To qualify for retirement relief, the individual must have attained the age of 50 at the time of the disposal — section 163(1)(a) — which Mr H has. As regards a disposal of shares, the company must be a trading company, the individual's personal company and the individual must be a full-time working officer or employee — section 163(5). 'Skateboard' does not say whether J Ltd trades, so we must assume that it does.
Mr H is not a full-time working officer or employee but, where (perhaps in anticipation of retirement) the individual ceases to be such, the tests in section 163(5) may be viewed at the date of cessation of full-time employment so long as:

the company remained his personal company from the cessation of full-time employment to the date of disposal, and
the individual continued to devote at least ten hours per week to the company in a technical or managerial capacity.

So, the operative date is April 1995 at which time J Ltd was Mr H's personal company (assuming he still held 10 per cent of the voting shares from June 1994). He was a full-time employee and we assume J Ltd trades.
Mr H did devote ten hours per week to the company from then until the disposal but he fails the test in section 163(7) because J Ltd did not remain his personal company. By the date of disposal his holding was reduced to 1.94 per cent. To be his personal company, he must have held at least 5 per cent of the voting rights — paragraph (1)(2) of Schedule 6 to the Taxation of Chargeable Gains Act 1992. His wife's holdings are irrelevant because the voting rights must be exercised by the individual (making the disposal) personally.
Therefore the conditions for retirement relief are not satisfied. The Snark.

Roll on the Tax Law Rewrite project! Here we get bounced around between subsections 5 and 7 of section 163, Taxation of Chargeable Gains Act 1992. Subsection 5 gives us one operative date and subsection 7 gives a different operative date if certain conditions apply with some conditions being the same in both cases, so one's head spins as to what exactly is wanted and when.
Subsection 5 requires the company to be the taxpayer's personal company on the operative date which is normally the date of disposal. Subsection 7 says that an earlier operative date can be taken if subsection 6 applies or if the company is the taxpayer's personal company. Repeating the same condition for a different rule to apply causes much confusion, and never more so than in the situation set out in this query.
The first point is that subsection 6 does not apply here so there is no point in looking at that. Subsection 6 relates to cases where a company ceases trading before there is a disposal of the shares.
Moving on to subsection 7, and excising from it all references to subsection 6, one is left with two requirements which must be fulfilled if one can have an earlier operative date than the date of disposal of the shares. In the circumstances of this question, this would be the only hope. If the operative date is the time of disposal, then the company was not the taxpayer's personal company at that stage and the claim falls down. We therefore look to subsection 7 to see if an earlier operative date can be taken.
The conditions for having an earlier operative date must apply throughout the time, starting with the day on which the taxpayer ceased to be a full-time working officer or employee of the company and ending on the date of disposal. Throughout this period of time, the two conditions are that the taxpayer must have remained an employee of the company concerned and devoting at least ten hours per week, averaged over the period, to the service of the company. Remember that 'average' means exactly that. It does not mean that the taxpayer has to turn up every day. Fifty days in the office during a six months period and no days in for the following six months is an average of twenty-five days in the office for one year.
Unfortunately the second condition, which is the one repeated from subsection 5, gives a severe problem here. The second condition is that throughout the time after ceasing to be a full-time working employee and ending on the date of the disposal, the company must have been the taxpayer's personal company. Unfortunately that does not appear to be the case here and so the claim falls at the last fence. — Big Shot.

Issue: 3777 / Categories:
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