Court of Appeal finds that entrepreneurs' relief was available

In The Quentin Skinner 2015 Settlement L & Ors v HMRC [2022] EWCA Civ 1222, the Court of Appeal overturned the decision of the Upper Tribunal (UT) and held that entrepreneurs' relief (ER) (now business asset disposal relief) was available for the taxpayers as the qualifying time period to hold shares before disposal did not apply to trusts.

Background

On 30 July 2015, Mr Ludovic Skinner, Mr Rollo Skinner and Mr Bruno Skinner (the beneficiaries) were given interests in possession under the L Skinner Settlement, the R Skinner Settlement and the B Skinner Settlement, respectively. 

On 11 August 2015, Mr Quentin David Skinner gave 55,000 D ordinary shares in DPAS Ltd (the company) to each of the settlements. The beneficiaries had each held 32,250 C class shares with full voting rights in the company since 2011. They were also each officers of the company from at least 2011 onwards. On 1 December 2015, the trustees of the settlements disposed of the D ordinary shares.

The trustees of the settlements submitted claims to HMRC for ER which were rejected and they appealed to the First-tier Tribunal (FTT). 

Legislation

The relief is available only if there is a disposal of trust business assets within the meaning of section 169J, Taxation of Chargeable Gains Act 1992 (TCGA), which requires “the relevant condition” set out in section 169J(4) to be met in the case of a disposal of shares in a company. For disposals before 6 April 2019, the relevant condition was that, throughout a period of one year ending not earlier than three years before the date of the disposal, the company was “the qualifying beneficiary’s personal company” as well as a trading company and “the qualifying beneficiary is an officer or employee of the company” (the reference to one year was changed to two years for disposals on or after 6 April 2019). A company is a personal company of an individual if the individual held at least 5% of the ordinary share capital of the company and at least 5% of the voting rights as a result of that holding (section 169S(3), TCGA). A “qualifying beneficiary” is defined in section 169J(3), as an individual with an interest in possession under the trust (otherwise than for a fixed term).

The issue

It was common ground that the beneficiaries satisfied the conditions in section 169J(4) for the requisite period, but they only held interests in possession in their respective settlements for a period of about 4 months up to the date of disposal. 

The sole issue for determination by the FTT was whether the qualifying beneficiary had to satisfy that definition throughout the same one-year period that the conditions in section 169J(4) were met, or whether it was sufficient for the qualifying beneficiary to have their interest in possession under the trust at the time of the disposal.

FTT decision

The appeal was allowed.

The FTT rejected HMRC's construction of the relevant legislation and held that, for the purposes of ER, an individual only needs to be a qualifying beneficiary at the time of a disposal of settlement business assets by the trustees of a settlement.

In the view of the FTT, Parliament intended section 169J to act as an extension to the provisions in section 169I(5) and (6). The focus of section 169J(4) was not on the qualifying beneficiary (which was determined by reference to section 169J(3)), rather it was on the company by providing that the company must be a personal company during the specified period. The reference to the qualifying beneficiary was simply to identify whose personal company it was.

A copy of the FTT's decision can be viewed here. 

HMRC appealed to the UT. 

UT decision

The appeal was allowed.

The UT concluded that section 169J(4) did require a beneficiary to be a qualifying beneficiary throughout the period of one year ending not earlier than three years before the disposal. 

In coming to this conclusion, the UT considered section 169J(4) in the context of Chapter 3, Part 5, TCGA, as a whole, in particular, section 169O(1). The UT also emphasised Parliament's decision to refer to "the qualifying beneficiary" rather than "the individual" in section 169J(4) and to define the expression "the qualifying beneficiary". In its view, other provisions concerning ER demonstrated that Parliament had understood the need to distinguish between the qualifying beneficiary and the individual. In the view of the UT, the FTT wrongly assumed that Parliament introduced section 169J to simply extend the entrepreneurial connection without imposing any additional conditions.

A copy of the UT's decision can be viewed here. 

The trustees of the settlements appealed to the Court of Appeal.  

Court of Appeal's judgment

The appeal was allowed.

In considering whether the three ingredients of a qualifying disposal of trust business assets were met, the Court considered the following:

1. Was there a qualifying disposal of trust business assets?

This issue was not in dispute between the parties so did not require further consideration by the Court. 

2. Could a qualifying beneficiary be identified?

The definition in section 169J(3) simply required the beneficiary to have an interest in possession at the time of the disposal; there was no requirement in the definition for the interest to have been held for a minimum period.

3. Were the conditions above met throughout a one-year period?

In the view of the Court, it was not necessary that the qualifying beneficiary should have had the interest in possession throughout a one year period. It would have been wholly foreign to the statutory scheme to extract a further condition from the third ingredient that was not expressly articulated and which was absent from the definition of a qualifying beneficiary. References to the qualifying beneficiary in the other conditions (and elsewhere in the ER provisions) were simply to the individual who had been identified as such.

Comment 

HMRC will no doubt be disappointed by the Court of Appeal's decision and it has expressed concern that the decision will enable family trusts (involving companies) to obtain entitlement to business asset disposal relief by simply appointing an interest in possession for an individual shortly before shares are disposed of and terminating that interest shortly thereafter.

The Court of Appeal's judgment can be viewed here.