An unwelcome additional tax liability for not taking tax advice early

We were recently approached to advise on the capital gains tax position of a share disposal.


Mr A had paid a minimal sum for a 5% shareholding when he first started to work for a new startup company, some 20 years ago.  The company had grown in value over the last 20 years but required to raise some additional funding, which it did by issuing further shares in the company.  Mr A for one reason or another did not subscribe or was not offered any additional shares.  As a consequence of this his shareholding fell below 5% of the total shares in issue.


On first reading, you may be thinking this is not a problem for indeed Mr A did receive a substantial sum of money for his shares and he would have to pay any resultant capital gains tax liability.  You might also be thinking he could claim ‘Bad Asset Disposal Relief (BADR)’ resulting in only a 10% tax liability.  Unfortunately, this will not be possible as the additional issue of shares diluted his shareholding to below the critical percentage of 5%.


Had Mr A taken advice at the time of the share dilution, we could have made an election to create a disposal and re-acquisition at the date of dilution thereby securing the BADR claim.  This would have saved nearly £100,000 in tax.

Our advice is that if you anything changes in respect of shares you hold in a company then seek advice.  We can be contacted on 01245 326280 and the initial consultation is free of charge.