In George v HMRC, the First Tier Tribunal (FTT) decided that they could not impute voting rights to shares for the purpose of a shareholder being able to claim entrepreneurs’ relief (ER). One of the conditions to claim ER is that the individual is able to exercise at least 5% of the votes in the relevant company “by virtue of” their shareholding in the company.
In this case, Mr George had been appointed a director in a family-owned company, Thornton & Ross Limited (TLR) which was thereafter managed by one of the family members (Mr Jonathan Thornton) and Mr George. A few years after joining the company, Mr George was allowed to acquire shares in the company. The shares acquired by Mr George represented 6.9% of the nominal value of the company’s ordinary share capital but did not carry any voting rights. Following a failed attempt to sell TLR, at which time Mr George was advised that he did not qualify for ER because his shares did not carry any voting rights, Mr George and Mr Thornton agreed that shares would be given voting rights, so as to secure ER. This agreement was not documented immediately. In addition, the company’s accountants were concerned that giving voting rights to Mr George would result in a ‘value shift’ tax charge falling on the other shareholders. As a result of this, despite the agreement, the rights were not formally granted to the shares held by Mr George until almost 12 months later.