When claiming Entrepreneurs' Relief (ER) on the sale of securities or shares in a company, there are two 5% rules to bear in mind. The vendor must hold 5% of the ordinary shares and those shares must provide 5% of the voting rights.
Special attention must be paid where there are multiple classes of shares in a company. Just because a taxpayer owns 5% of the ordinary shares, this does not automatically give them 5% of the voting rights or, indeed, vice versa. Ordinary shares for ER purposes are any shares in issue other than those that are only entitled to a dividend at a fixed rate and no other right to share in the profits. It is necessary to look beyond the label of a class of shares and assess what the shareholder is actually entitled to. Participating preference shares may qualify as ordinary shares under this definition.
Once a company meets the conditions and the taxpayer qualifies for ER, the disposal of any shares or securities in that company will be taxable with the benefit of ER, even if some of those shares are in themselves not a class of share or security that would entitle the taxpayer to claim ER.
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