Entrepreneurs' relief applied to disposal of business premises

In Christopher Thompson v HMRC [2021] UKFTT 453, the First-tier Tribunal (FTT) held that entrepreneurs' relief (ER) was available on the sale of business premises notwithstanding that the sale was part of a business sale that took place over more than 20 years.

Background

Christopher Thompson (the taxpayer) was a partner in a firm of accountants.  He had taken up partnership in 1970 (the partnership) and, over the course of his time as a partner, the partnership had acquired business premises (the premises).  By 1990, he had become beneficially entitled to 99.9% of the premises through the partnership.  

By 1996, the taxpayer started to consider retirement and succession.  He agreed with two new partners that they would gradually buy-out his share of the partnership's work in progress, which then amounted to £434,000, at £20,000 per year each.  The taxpayer was to gradually transfer his clients over to the new partners.  Due to complications with client matters (including the administration of complicated estates for individual clients), the handover of clients was not completed until 2021.  

The premises were sold to the taxpayer's pension scheme in October 2017, and the partnership took a three-year lease of the premises with an option to renew.

The taxpayer claimed ER from capital gains tax on the disposal of the premises. HMRC denied the relief, on the ground that the taxpayer had not made a disposal of business assets.  The taxpayer appealed to the FTT.

Legislation

Chapter 3, Part 5, Taxation of Chargeable Gains Act 1992 (TCGA) sets out the requirements for ER, which allows for the application of a lower rate of capital gains tax on certain disposals.  Section 169I(1)(a), TCGA, provides that there is a 'material disposal of business assets' for the purposes of the relief, where 'an individual makes a disposal of business assets' (defined in section 169I(2) as including 'the whole or part of a business, or assets in use at the time of cessation of a business, for the purposes of that business').  It goes on to provide, at section 169I(8), that 'the disposal by an individual of the whole or part of the individual's interest in the assets of a partnership is to be treated as a disposal by the individual of the whole or part of the business carried on by the partnership', and that 'at any time when a business is carried on by a partnership, the business is to be treated as owned by each individual who is at that time a member of the partnership'.

FTT decision

The appeal was allowed.

HMRC argued that there had been no disposal of business assets for the purposes of the statutory test for ER as the taxpayer had sold only the premises.  It accepted that separate disposals in different tax years might constitute the disposal of all or part of a business, but evidence of such disposals was required, and the present facts did not justify treating a 22 year disposal process as part of the same transaction.

The taxpayer argued that he had sold the premises as part of his retirement; all assets that he had previously held in the partnership had been disposed of, and while the retirement had taken longer than anticipated, this was for good commercial reasons.  The sale of the premises was part of the taxpayer's retirement arrangements.

The FTT agreed with the taxpayer. There were no hard delineations limiting the application of section 169I(1)(a), as adapted by section 169I(8), for partnerships.  Section 169I(1)(a) did not depend solely on looking at the capital gains tax assets being disposed of.  While, on a proper view of the legislation, the disposal of a single business asset without the disposal of the other assets would not satisfy section 169I(1)(a) or 169I(8), this was not the position in this case.  The taxpayer's disposal of the premises was part and parcel of a wider disposal of all his partnership assets that was still taking place at the time of sale of the premises.  The FTT commented that the events under consideration took place over an 'extreme' period of time, and although the facts were  unusual,  it was clear that on those facts the test for ER on the disposal of the premises was met.

Comment 

While the facts of this case were unusual, it nonetheless provides useful commentary on the test for ER (now business asset disposal relief), in particular, the confirmation that ER will not apply to the disposal of a single asset held by a business, as distinct from a disposal of part of the business, should be borne in mind.  

Taxpayers intending to claim business asset disposal relief in relation to the disposal of a business over a prolonged period of time should ensure that they carefully document their intention in order to maximise their prospects of success, should HMRC reject their claim and the matter has to be determined by the FTT.

The decision can be found here.