Overhead shot of a man using a laptop and an old wired telephone

The recent case of George v HMRC saw the former shareholder of a British pharmaceutical company use an “ingenious” yet ultimately unsuccessful argument to try and claim entrepreneurs’ relief on the sale of his shares. 

Facts of the case

Mr George became a director of Thornton & Ross Limited (TRL) in October 2001 and was promoted to chief executive in March 2002.

To reflect Mr George’s growing importance to TRL, he was offered the opportunity to acquire shares in the company. He paid just over £1 million to acquire 600 C Ordinary Shares and 1,547 D Ordinary Shares in the company. Neither of these classes of shares carried any voting rights.

It was decided in 2010 that Mr George and TRL’s chairman, Mr Thornton, would prepare TRL for sale. During this time, Mr George was informed by his tax advisor that he would not qualify for entrepreneurs’ relief as his shares did not carry any voting rights. It was therefore agreed that some of the consideration for Mr George’s shares in TRL would be shares in a new company being incorporated specifically to purchase TRL. Mr George’s shares in the new company would have voting rights, and therefore these could qualify for entrepreneurs’ relief on any future sale.

However this sale fell through. Mr Thornton was worried that Mr George might leave TRL, and so on 21 February 2012 promised that the company would be sold in the next couple of years, and that Mr George’s shares would be given voting rights. On 10 January 2013, a special resolution was passed granting voting rights to Mr George’s shares. 

In 2013, another offer was received for the acquisition of TRL. Mr George was mindful of the failure of the previous offer to buy TRL, and so he was keen for the deal to proceed. The acquisition completed on 16 August 2013. 

Qualifying for entrepreneurs’ relief

The problem for Mr George was that to qualify for entrepreneurs’ relief, he had to have held voting shares in TRL for at least one year prior to the sale. As he only held voting shares for about 7 months, he did not qualify for the relief. 

However, Mr George claimed that his agreement with Mr Thornton on 21 February 2012 to give voting rights to his shares was legally binding. He relied on the maxim “equity looks on that as done which ought to be done”. Mr George used this maxim to argue that as a matter of equity, his shares should be treated as having voting rights from 21 February 2012 when the binding agreement with Mr Thornton was created. Consequently, he argued his shares had held voting rights for over one year. 


After considering Mr George’s argument, and describing it as “ingenious and clever”, the tribunal dismissed his argument for the following reasons:

– The agreement of 21 February 2012 was not legally binding. A special resolution of TRL’s shareholders would be required to amend the articles of association to enfranchise Mr George’s shares. Mr Thornton did not in his own right control enough shares to have procured this special resolution alone.

– The equitable maxim can only give the claimant equitable rights over property which is owned by another party. However in this case, Mr George already owned his shares. 

– Section 169S(3)(b) of the Taxation of Chargeable Gains Act 1992 meant that qualifying for entrepreneurs’ relief required Mr George to have at least 5% of the voting rights in TRL exercisable “by virtue of that holding”. Even if the agreement of 21 February 2012 was specifically enforceable, Mr George would have had his voting rights because of this agreement and not because of his shareholding. 

Lessons to be learnt

This case highlights the importance of meeting all of the criteria necessary to qualify for entrepreneurs’ relief when selling shares in a company namely:

– the company must be a trading company, or the holding company of a trading group;

– the seller must hold at least 5% of the company’s ordinary share capital, and these shares must allow the seller to exercise at least 5% of the voting rights in the company; and 

– the seller must be an officer or employee of the company, or of another company in the company’s group.

Unfortunately for Mr George, all of these criteria must be satisfied for at least one year prior to the sale of the shares. It is worth making sure that your company’s affairs (and shareholdings!) are in order well before there is a purchaser is on the scene.  

Catherine Carlton is a senior associate in our corporate team based in Exeter.  The team are ranked as the number one corporate team for SME’s in the South West by Chambers independent guide to the legal profession. To contact Catherine, please call 01392 210700 or email corporate.exeter@stephens-scown.co.uk.