HMRC v Quentin Skinner 2005 Settlement: an update
We give an update following the recent decision regarding the availability of Entrepreneurs’ Relief for trusts.
The Court of Appeal has overturned the previous decision of the Upper Tribunal ("UT") which confirmed that for a trust to benefit from Entrepreneurs’ Relief ("ER") from Capital Gains Tax ("CGT"), a beneficiary must have held an interest in possession throughout the relevant period. That previous decision is summarised in our article of May 2021.
Quentin Skinner made three separate settlements on 30 July 2015, and his sons, Ludovic Skinner, Rollo Skinner and Bruno Skinner each had an interest in possession in one of the settlements. An interest in possession means that the beneficiary is entitled to receive the income generated by the assets in the settlement, but they are not, (unless the trustees have the necessary powers), entitled to the capital absolutely.
On 11 August 2015, Quentin Skinner gave 55,000 ordinary D shares in DPAS Limited ("the Company") to the trustees of each settlement.
On 1 December 2015 each settlement disposed of the shares and the respective trustees claimed ER (known as Business Asset Disposal Relief since April 2019) on the disposal under the Taxation of Chargeable Gains Act 1992 ("TCGA 1992").
Conditions of ER
ER is available as a relief from CGT on the disposal of qualifying business assets by a trust. The key point is that there must be a ‘qualifying beneficiary’. A qualifying beneficiary is one which has an interest in possession (not for a fixed term) in the trust, or the part of the trust, which holds the qualifying business assets.
Qualifying business assets (in this case, shares in a company) must, for a period of 2 years within the 3 years immediately preceding the date of the disposal ("the relevant period") meet the following conditions:
- The company must have been the qualifying beneficiary's personal company (the beneficiary must hold at least 5% of the ordinary share capital and at least 5% of the voting rights in a personal capacity);
- That company must be a trading company; and
- The qualifying beneficiary must be an officer of the company.
[Note: the relevant period for the purpose of this case was 1 year, since 6 April 2019, the relevant period has been extended to 2 years].
The issue in the appeal
As individuals, the three beneficiaries were officers of the Company, and each held 32,250 C chares in the Company with full voting rights. Therefore they were qualifying beneficiaries for the purpose of the trust disposals and would, separately from the trust, satisfy the conditions for ER on a disposal of shares in their personal capacity.
The three beneficiaries had only gained an interest in possession in their settlement around four months prior to the disposal. The issue was therefore whether a qualifying beneficiary had to have an interest in possession throughout the relevant period for the trustees to successfully claim ER, or whether it was enough that an interest in possession existed at the date of disposal.
The UT, overturning the decision of the First Tier Tribunal and ruling in favour of HMRC, found that the interest in possession must exist throughout the relevant period, as this would show a meaningful link between the qualifying beneficiary's business, and the qualifying beneficiary's interest in possession.
Decision of the Court of Appeal
The Court of Appeal found in favour of the trustees, overturning the decision of the UT. They ruled that the focus of s169J of the TCGA 1992 was on the nature and duration of the relationship between the qualifying beneficiary and the Company, not on the duration of the qualifying beneficiary's interest in possession. There is no requirement in the legislation that an individual must have an interest in possession for a minimum period, only that it must exist at the time of the disposal.
Key points to note
ER is available for qualifying business assets held in a trust, so long as there is qualifying beneficiary at the time of the disposal who themselves, independently of their status as a beneficiary, satisfy the conditions of s169(J) of the TCGA 1992 as set out above.
This will be a welcome decision to trustees hoping to claim ER on disposals of shares, especially if there is an impending sale and insufficient time to plan ahead. That said, we would still recommend that trustees keep their trusts under review, take professional advice early on if a disposal of business assets is anticipated, and consider if any changes to the trust are needed well in advance of any potential disposal.
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The information in this article is necessarily of a general nature. The law stated is correct at the date (stated above) this article was first posted to our website. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.