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Question was tested on (06/2011)
Bon
Bon has been the sales director of Alphabet Ltd since 1 February 2017, having not previously been an employee of the company, although she had been a shareholder since 1 March 2016. She accepted XYZ plc’s share alternative of one £1 ordinary share for each of her 25,000 £1 ordinary shares in Alphabet Ltd. Bon had purchased her shareholding on 1 March 2016 for £92,200. On 4 March 2018 Bon made a gift of 10,000 of her £1 ordinary shares in XYZ plc to her brother. On that date the shares were quoted on the stock exchange at £7.10 – £7.14. Holdover (gift) relief is not available in respect of this disposal.Dinah
Dinah has been an employee of Alphabet Ltd since 1 May 2016. She accepted XYZ plc’s share alternative of one £1 ordinary share for each of her 3,000 £1 ordinary shares in Alphabet Ltd. Dinah had purchased her shareholding on 20 June 2015 for £4,800. On 13 November 2017 Dinah sold 1,000 of her £1 ordinary shares in XYZ plc for £6,600. Dinah died on 5 April 2018, and her remaining 2,000 £1 ordinary shares in XYZ plc were inherited by her daughter. On that date these shares were valued at £15,600. For the tax year, 2017/18 Dinah had taxable income of £12,000.(Q)Which TWO of the following statements are correct about Bon and Dinah’s entitlement to entrepreneurs’ relief on their disposals of shares in Alphabet Ltd?
(1) Alphabet Ltd was not Bon’s personal company for the requisite time before disposal.
(2) Bon was not an officer or employee of Alphabet Ltd for the requisite time before disposal.
(3) Dinah was not an officer or employee of Alphabet Ltd for the requisite time before disposal.
(4) Alphabet Ltd was not Dinah’s personal company for the requisite time before disposal.(a) 1 and 3
(b) 2 and 3
(c) 1 and 4
(d) 2 and 4ANSWER in BPP BOOK
(D)2 and 4
Bon only became a director on 1 February 2017, so this qualifying condition was not met for one year prior to the date of disposal. Her shareholding of 25% (25,000/100,000 ? 100) satisfies the minimum required holding of 5% for Alphabet Ltd to be her personal company and this qualifying condition was met for one year prior to the date of disposal.
Dinah was an employee for more than one year prior to the disposal but her shareholding of 3% (3,000/100,000 ? 100) is less than the minimum required holding of 5%.I didn’t understand that why BON did not qualify for Entrepreneurs relief cause he had met the condition of being the employee ie director for 12 months prior to disposal. (From 1/2/17 to 4/3/18 is 13 months)
I don’t think you have given all the information required from the question – I cannot see reference in the question to the number of shares (100,000) that existed in Alphabet nor to the date of the takeover by XYZ plc of Alphabet – we are dealing here with a question about the disposal of the Alphabet shares not the XYZ shares!
Sorry, Sir. I will post the whole question here
On 15 October 2017 Alphabet Ltd, an unquoted trading company, was taken over by XYZ plc. Prior to the takeover Alphabet Ltd’s share capital consisted of 100,000 £1 ordinary shares, and under the terms of the takeover, the shareholders received for each £1 ordinary share in Alphabet Ltd either cash of £6 per share or one £1 ordinary share in XYZ plc worth £6.50. The following information is available regarding three of the shareholders of Alphabet Ltd:
Aloi
Aloi has been the managing director of Alphabet Ltd since the company’s incorporation on 1 January 2011, and she accepted XYZ plc’s cash alternative of £6 per share in respect of her shareholding of 60,000 £1 ordinary shares in Alphabet Ltd. Aloi had originally subscribed for 50,000 shares in Alphabet Ltd on 1 January 2011 at their par value and purchased a further 10,000 shares on 20 May 2012 for £18,600.
On 6 February 2018 Aloi sold an investment property, and this disposal resulted in a chargeable gain against which her annual exempt amount will be set.
For the tax year, 2017/18 Aloi has taxable income of £60,000. All her income tax has previously been collected under PAYE so she has not received a notice to file a return for the tax year 2017/18 and so is required to give notice of her chargeability to capital gains tax to HMRC.Bon
Bon has been the sales director of Alphabet Ltd since 1 February 2017, having not previously been an employee of the company, although she had been a shareholder since 1 March 2016. She accepted XYZ plc’s share alternative of one £1 ordinary share for each of her 25,000 £1 ordinary shares in Alphabet Ltd. Bon had purchased her shareholding on 1 March 2016 for £92,200. On 4 March 2018 Bon made a gift of 10,000 of her £1 ordinary shares in XYZ plc to her brother. On that date, the shares were quoted on the stock exchange at £7.10 – £7.14. Holdover (gift) relief is not available in respect of this disposal.Dinah
Dinah has been an employee of Alphabet Ltd since 1 May 2016. She accepted XYZ plc’s share alternative of one £1 ordinary share for each of her 3,000 £1 ordinary shares in Alphabet Ltd. Dinah had purchased her shareholding on 20 June 2015 for £4,800. On 13 November 2017 Dinah sold 1,000 of her £1 ordinary shares in XYZ plc for £6,600. Dinah died on 5 April 2018, and her remaining 2,000 £1 ordinary shares in XYZ plc were inherited by her daughter. On that date, these shares were valued at £15,600. For the tax year, 2017/18 Dinah had taxable income of £12,000.(Q)Which TWO of the following statements are correct about Bon and Dinah’s entitlement to entrepreneurs’ relief on their disposals of shares in Alphabet Ltd?
(1) Alphabet Ltd was not Bon’s personal company for the requisite time before disposal.
(2) Bon was not an officer or employee of Alphabet Ltd for the requisite time before disposal.
(3) Dinah was not an officer or employee of Alphabet Ltd for the requisite time before disposal.
(4) Alphabet Ltd was not Dinah’s personal company for the requisite time before disposal.(a) 1 and 3
(b) 2 and 3
(c) 1 and 4
(d) 2 and 4ANSWER in BPP BOOK
(D)2 and 4
Bon only became a director on 1 February 2017, so this qualifying condition was not met for one year prior to the date of disposal. Her shareholding of 25% (25,000/100,000 ? 100) satisfies the minimum required holding of 5% for Alphabet Ltd to be her personal company and this qualifying condition was met for one year prior to the date of disposal.
Dinah was an employee for more than one year prior to the disposal but her shareholding of 3% (3,000/100,000 ? 100) is less than the minimum required holding of 5%.I didn’t understand that why BON did not qualify for Entrepreneurs relief cause he had met the condition of being the employee ie director for 12 months prior to disposal. (From 1/2/17 to 4/3/18 is 13 months)
Thank you for sending the additional information.
As per my comments of yesterday the issue here is about the availability of Entrepreneurs’ Relief (ER) on the disposal of the Alphabet shares NOT the XYZ shares which is the disposal date that you refer to in your original query.
The Alphabet shares were disposed of at the date of takeover, 15/10/17 and although Bon had held the required 5% shareholding for the requisite 12 month period at that date, she had not been an employee for 12 months as she only started work for the company on 1/2/17 – hence no ER!Thanks a lot, sir.
So that means the takeover of Alphabet Ltd by XYZ Ltd and Bon receiving XYZ Ltd shares against Alphabet Ltd shares are considered to be Disposal of shares?Yes – although where a share for share takeover occurs share for share relief would automatically apply allowing no gain to arise on the disposal and the new shares to acquire the cost of the old shares – see OT notes Chapter 13 section 4 page 87. Note however point 4 in this note that states that an election is available to disapply the share for share relief and allow the gain on disposal to crystallise – why would the taxpayer want to do this? – to take advantage of the entrepreneurs’ relief available on the old shares which would not be available on the new shares acquired – for example the taxpayer owns 25% of A Ltd and is an employee, but V plc takes over A Ltd with the taxpayer becoming a 1% shareholder in V plc and therefore no ER would be available on the future disposal of the V plc shares
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