The Court of Appeal (CoA) had published its judgement on a case regarding Entrepreneurs’ Relief (since April 2020 Business Assets Disposal Relief (BADR)). The decision has overturned the judgement of the Upper Tribunal (UT) and reinstated the first instance decision of the First-tier Tribunal (FTT).
A father had set up three interest in possession trusts, one for each of his three sons, all of whom were officers of a company that the father controlled. The father then settled shares in the company to the three trusts. A few months later the trustees disposed of the shares but as each of the sons also held significant shares in the company the trustees claimed BADR, ensuring that the lower rate of capital gains tax at 10% would be charged. HMRC disagreed with this treatment holding that the trusts were required to hold shares for a minimum of 1 year (now 2 years since April 2019).
The shares were sold in December 2015 and this was before reduction in the lifetime limit of BADR to £1m from £10m in March 2020 so a considerable amount of tax was at stake, £1.75m. The FTT agreed with the trustees on the interpretation of the legislation. While at point of disposal an individual needs to own a 5% or more interest in the company to qualify, that holding can be acquired immediately before the disposal and this disposal would still qualify as long as the individual was an employee or officer of the company. The same was true of interest in possession trusts, if the beneficiary had the necessary connection to the company, by way of being an employee or officer for the required period (as mentioned now 2 years) then the disposal would qualify for BADR and attract capital gains tax at the lower rate of 10%.
The UT overturned this decision by reference to a section of the legislation that dealt with an apportionment issue where one or more beneficiaries qualified for BADR and another or more did not. The CoA has in its place overturned that decision holding that the section of legislation that the UT found convincing was ‘a section of considerable obscurity’. The CoA has confirmed that BADR operates in a similar manner to interest in possession trusts as it does to individuals in that there is no required ownership holding period but that at as long at the necessary holdings are held at disposal and the beneficiary has been an employee or officer for the required 2 year period ending in the 3 years before disposal then that disposal will qualify the lower rate of capital gains tax.
The decision can be found at: The Quentin Skinner 2015 Settlement L & Ors. v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
Please let us know if you have any questions on capital gains tax or Business Asset Disposal Relief. While the relief is not as generous as it used to be it is still a very generous relief and advantage should be taken of it to reduce exposure to tax payable.
