In a case which highlighted the vital distinction for tax purposes between shares that are acquired by subscription on issue, and those that are subsequently purchased, a businessman has convinced a tribunal that he is entitled to £46,000 in tax relief in respect of a shareholding that had become of negligible value.
The businessman and three colleagues had agreed to subscribe for £225,000 worth of new shares in the company for which they worked in order to alleviate its cash-flow difficulties. However, he was going through a divorce at the time; his assets had been frozen and he was unable to pay for the shares immediately.
One of the businessman’s colleagues agreed to subscribe for 18 shares in the company on his behalf. Those shares were transferred to the businessman a few months later on his payment of £46,000 to his colleague. The shares subsequently became of negligible value and the businessman claimed share loss relief in respect of the £46,000 as provided for in the Income Tax Act 2007.
HM Revenue and Customs argued that the conditions for such relief were not satisfied in that the businessman had not acquired the shares by subscription on issue but had subsequently purchased them from his colleague. It was submitted that the colleague had paid for the relevant shares himself and that his eventual disposal of them to the businessman was at a significant profit.
In allowing the businessman’s appeal, the First-tier Tribunal (FTT) found that it had been the businessman’s intention to subscribe for the shares at the outset but that he had modified his plans due to his divorce. Although the colleague could not be said to have acted as the businessman’s nominee in the usual sense, there was a contractual agreement between them by which the former was obliged to transfer the shares to the latter on payment of £46,000.
The businessman had been bound to pay for the shares once his divorce was finalised and his assets un-frozen. In those circumstances, the colleague had effectively held the shares to the businessman’s order and as security for his obligation to pay the agreed sum.
The businessman had agreed to participate in the subscription from the outset and his colleague had effectively lent him the money to fulfil that agreement given his financial situation at the time. The FTT concluded that the businessman fell to be treated as if he had subscribed for the shares himself and was thus entitled to the share loss relief claimed.