Preference shares – when are they Ordinary Share Capital?

Whether shares to be disposed of are considered to be “ordinary share capital” (OSC) is important in determining the availability of entrepreneurs’ relief (ER),”.

To qualify for ER, the company in which the shares are being disposed of must be the shareholder’s “personal company”. Part of the personal company test is that the shareholder must hold at least 5% of the OSC of the company. That 5% is measured by reference to the nominal value of the shares.

OSC, in relation to a company, means all the company’s issued share capital (however described), other than “fixed rate preference shares”, which are broadly defined as shares having a right to receive a dividend at a fixed rate but have no other right to share in the company’s profits (s 989,  ITA 2007).

At first glance, it would appear that the question of what is a fixed rate preference share should be relatively clear-cut. In practice however, it can be difficult where there are a number of different share classes. Until recently HMRC’s published guidance on the matter has been  incredibly ambiguous.

In 2016 two differently constituted First-tier Tribunals reached different conclusions as to whether shares with no right to dividends constituted OSC. Both cases were appealed. The Upper Tribunal case of HMRC v McQuillan (2017) determined that a class of redeemable shares with no dividend entitlement does form part of a company’s OSC. In, Castledine v HMRC (2016) it was found that deferred shares with little value and no dividend rights were also part of a company’s OSC. Following these decisions the Chartered Institute of Taxation (‘CIOT’) published the document below which sets out examples of different shares rights and HMRC’s view on whether they form part of a company’s OSC. 

The document outlines HMRC’s initial view of whether a preference share would be considered to be ordinary share capital in a number of scenarios. It should be noted that the guidance is not always 100% conclusive, leaving the possibility that some of the scenarios are open to interpretation (such as a fixed rate preference share with a negligible proportion of the total proceeds on an exit).

What has been highlighted by these events, is that expert advice should ALWAYS be obtained prior to altering the share structure of a company, as the implementation of structure with differing share rights can have enormous consequences when it comes to a company exit. Where you act for companies that have a number of share classes the ER position should be kept under review as any changes to the shares may need to be in place for two years to ensure ER is available.

For further information on this matter please contact Thomas Dalby, James Lindon or Liam Hawkins on 0845 4900 509 or email us on