Understanding ordinary share capital for tax reliefs

A company's ordinary share capital has the same definition for both income tax and corporation tax purposes. Therefore, knowing if a share is ordinary is vital to qualify for various tax reliefs, For example,  share loss relief, SEIS, EIS. Business Asset Disposal Relief and Corporation Tax substantial shareholding exemption.

ordinary share capital

What are ordinary shares?

Ordinary share capital means all the company's issued share capital, except capital where holders have a right to a fixed dividend rate, but no other right to share in a company's profits. 

For a share to be ordinary, it must:

  • Firstly, have a right to receive a variable dividend.
  • Secondly, include a right to a fixed dividend and a share of the company's profits. 
  • Lastly, have a right to participate in the company's profits beyond dividends.

What's more, an ordinary share does not require voting rights or to be labelled 'ordinary'

Non-ordinary shares

A share is not ordinary if it:

  • Firstly, has a right to a fixed rate dividend.
  • Secondly, possesses no other rights to participate in the company's profits.

Taking into account the above, a non-ordinary share is a preference share with a fixed dividend and no other rights.

Business Asset Disposal Relief and ordinary shares

Capital Gains Tax Business Asset Disposal Relief requires more than simply holding ordinary shares. In addition, the shareholder must meet the following conditions:

  • Hold at least 5% of the company's ordinary share capital.
  • Have at least 5% of voting rights.
  • Be entitled to 5% of the distributable profits,
  • Have 5% of the rights to assets on winding up.
  • Have an entitlement to at least 5% pf the sale proceeds on the disposal of the company's share capital.

Moreover, this 5% test allows a shareholder to obtain relief on their entire holding even if it includes different types of share. 

Notable tax cases

Beware, as the definition of ordinary shares can be ambiguous as demonstrated in the tax cases below.

In the case of HMRC v Stephen Warshaw it was determined a claim for Business Asset Disposal Relief should be allowed. This was because cumulative compounding preference shares were ordinary shares. Equally importantly, the shares did not have a fixed dividend rate because dividends were varied based on the company's reserves. 

In Colin Bielckus, Mark Arnell and Kevin Taylor v HMRC adding voting rights to fixed rate preference shares did not make them ordinary shares. As a result, a claim for share loss relief was denied by HMRC.

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