Entrepreneurs’ Relief denied on guarantee rights

In John Tenconi v HMRC [2021] TC08088, the First Tier Tribunal (FTT) found that the transfer of a beneficial interest in guarantee rights was a chargeable disposal subject to Capital Gains Tax (CGT) and the rights could not be considered shares for the purposes of Entrepreneurs’ Relief.

• Mr Tenconi became a director of Monarch Assurance Holdings Ltd (MAH) in July 2008.
• MAH was limited by both share capital and guarantee rights.
  • ‘Shareholder members’ were ordinary shareholders who had contributed to the capital of the company and had:
    • Limited voting rights (only on matters which affected the shares).
    • A right to dividends of the lower of £2,000 and available profits.
    • A right to repayment of their capital on a winding-up or reduction of capital.
  • ‘Investor members’ paid £100 for each ‘distribution right’ they acquired. Distribution rights gave:
    • General voting rights.
    • A right to share in profits available for distribution where they exceeded £2,000.
    • A right to share in the surplus assets of MAH after repayment of share capital.
    • A right to repayment on a winding-up of amounts paid for the distribution rights.
  • Distribution rights:
    • Could be surrendered to the company for a cash payment, or in consideration of the issue of any security in the company.
    • There was no provision in the company’s articles for the transfer of distribution rights.
• In June 2009, Mr Tenconi became an investor member acquiring four distribution rights for £100 each.
• In 2015, another company (SHL) sought to acquire a subsidiary of MAH. This required the approval of the majority of investor members (having general voting rights).
• It was arranged for SHL to acquire the beneficial interest in Mr Tenconi’s distribution rights for £1m, so as to be able to vote in favour of the transaction.
• Mr Tenconi filed his 2015-16 tax return reporting the £1m receipt as a capital disposal and claiming Entrepreneurs’ Relief (ER) (known as Business Asset Disposal Relief since 6 April 2021).
• HMRC enquired into the return, later issuing a closure notice denying ER and charging a further £175,159 of tax.
• Mr Tenconi contended that:
  • There was no disposal and no chargeable gain assessable.
  • No capital sums derived from assets were received and so no sum was taxable.

On Review, HMRC upheld their position. Mr Tenconi Appealed to the FTT.

The FTT found in favour of HMRC:

• A chargeable gain accrued to Mr Tenconi.
  • The distribution rights were property and assets for the purposes of s.21 TCGA 1992.
  • The agreement with SHL clearly stated that Mr Tenconi transferred all of his beneficial interest in the distribution rights and undertook to account to SHL for any amounts paid in respect of the rights.
  • Beneficial interest in the rights was capable of being disposed of and was so disposed to SHL for £1m.
• ER could not apply to the disposal.
  • For ER to be available, there must be a disposal of one or more assets consisting of (or interests in) shares or securities of a company.
  • The distribution rights were not shares and did not form part of the capital or issued share capital of the company.
  • It followed that the rights cannot fall within the definition of ‘Ordinary share capital’ for ER purposes.

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External link

John Tenconi v HMRC [2021] TC08088