Can preference shares qualify as ordinary for tax relief?

When can preference shares qualify as ordinary shares for tax relief purposes?

Updated: 26 October 2023

Business Asset Disposal Relief (BADR)

For a capital gain on a disposal of shares to qualify for BADR, the shares being disposed of must be held in the shareholder’s own personal company; this test says that at least 5% of ‘ordinary share capital’ (OSC) must be owned by the shareholder and they must also be entitled to a corresponding share of the company’s distributable profits and assets on a winding up or on a disposal of the company’s entire ordinary share capital. Learn more about BADR.

What is ordinary share capital?

Ordinary share capital is defined by the legislation as ‘’any share capital (irrespective of its name) which does not have a fixed right to the profits of the company’’

Often preference shares will fall outside this definition because they offer only fixed returns, but in the case of HMRC v Warsaw (2020) it was found that cumulative, compounding preference shares should be classed as ordinary share capital for the purpose of determining whether the 5% test has been met. This was on the basis that the compounding element of the preference share made the dividend variable rather than fixed.

It is clear from this ruling that issuing shares can have a very significant impact on shareholders of all classes and their BADR qualifying criteria, even if those shares are not called ordinary shares; whilst the above ruling is of benefit to shareholders of some preference shares, that benefit will also impact the percentage shareholdings of other holders of ordinary share capital.

Always take expert advice on issues relating to company shares. Individuals who own ordinary shares in companies that have also issued preference shares should seek advice on their personal position.

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When can preference shares qualify as ordinary shares for tax relief purposes?