HMRC v Quentin Skinner 2005 Settlement – Entrepreneurs’ relief and trusts

When will the disposal of shares by trustees qualify for Entrepreneurs’ Relief?

Please note that this decision was recently reversed by the Court of Appeal in Quentin Skinner 2015 Settlement v HMRC.  Please see our updated article for more information.

This case concerned the availability of Entrepreneurs’ Relief (“ER”) – a Capital Gains Tax (“CGT”) relief - to the trustees of three settlements. On 30 July 2015, Ludovic Skinner, Rollo Skinner and Bruno Skinner were each given an interest in possession under their respective settlement.

An “interest in possession” means that the beneficiary is entitled to receive the income generated by the trust fund but is not entitled under the terms of the trust to benefit from the capital (albeit there may be powers for the trustees to choose to do this).

On 11 August 2015, Quentin Skinner gave 55,000 ordinary D shares in DPAS Limited (“the Company”) to each of the three settlements. Just under four months later, on 1 December 2015, the trustees of each settlement disposed of the D ordinary shares.

From 2011, each of Ludovic, Rollo and Bruno personally held 32,250 ordinary C shares in the Company with full voting rights and each of them were also officers of the Company.

The trustees submitted a claim to HMRC for ER (known as “Business Asset Disposal Relief” since 6 April 2019) on the grounds that each of the beneficiaries satisfied the relevant conditions for ER to apply to the disposal under the Taxation of Chargeable Gains Act 1992 (“TCGA”).

ER conditions

ER is a relief from CGT on the disposal of qualifying busines assets. In summary, for ER to apply to the disposal of trust business assets, the following conditions must be met:

• The trustees of a settlement must make a disposal of settlement business assets.
• There must be an individual who is a qualifying beneficiary.
• Certain other relevant conditions must be met (more below).

A qualifying beneficiary is an individual who under the settlement has an interest in possession (otherwise than for a fixed term) in the whole or a part of the trust fund which includes the settlement business assets.

The relevant conditions mentioned above are that throughout a period of one year ending not earlier than three years before the date of disposal, the company is the qualifying beneficiary’s personal company, the company is a trading company (or the holding company of a trading group) and the qualifying beneficiary is an officer or employee of the company. Since 6 April 2019, the relevant period has been extended from one year to two years.

A company is an individual’s personal company if the individual holds at least 5% of the ordinary share capital and at least 5% of the voting rights as a result of their shareholding.

The issue in question

In a personal capacity, the three beneficiaries all satisfied the relevant conditions under s.169(J)(4) TCGA 1992, and they were qualifying beneficiaries at the time of the disposal.  However, they had only gained an interest in possession in the settlements around four months prior to the disposal.

This raised the question of whether they had to have an interest in possession throughout the same one-year period during which the other conditions in s.169(J)(4) were met, or if it was sufficient that they had an interest in possession under the trust at the time of disposal?

Decision

The First Tier Tribunal (“FTT”) held that an individual only needs to be a qualifying beneficiary at the time of disposal by the trustees. The FTT therefore allowed the trustees’ claim for ER.

HMRC appealed the FTT’s decision and was concerned that a family trust, for example, could obtain ER on any share disposal by appointing an interest in possession for a qualifying beneficiary on the day of disposal. The interest could be terminated shortly afterwards, and ER would become little more than a tick-box exercise.

The Upper Tribunal (“UT”) found in favour of HMRC.  The UT ruled that the beneficiary must have had an interest in possession throughout the relevant period.  The UT found that there must be an enduring and meaningful link between the qualifying beneficiary’s business and the qualifying beneficiary’s interest in possession in the trust.  This link is provided if there is a requirement for the beneficiary to be a qualifying beneficiary throughout the one-year period prior to the disposal. 

Key points to note

The UT’s decision confirms HMRC’s position that ER is only available if the qualifying beneficiary held an interest in possession for a period of one year, ending not longer than three years prior to disposal before 6 April 2019 (and for a period of two years for disposals after this date).

For trustees hoping to claim ER on disposals of shares, this will only be possible if the beneficiary has held an interest in possession in the trust fund (or the relevant part) for two years prior to the disposal.  If a disposal is anticipated and the beneficiary meets all of the other requirements for ER to apply, this means that trustees will need to plan ahead and consider if any changes are needed to provide the beneficiary with an interest in possession well in advance of any disposal.