HMRC have recently successfully appealed a decision of the First Tier Tribunal in respect of a trust’s ability to attract Business Asset Disposal Relief (‘BADR’) or ‘old Entrepreneurs’ Relief’. The Skinner case revolves around the correct interpretation of legislation that determines whether the trustees of a settlement attract BADR on the disposal of trading company shares.
As a recap:
• Only interest in possession trusts (ones where beneficiaries have a right to income) and not discretionary trusts, have any chance of attracting this relief.
• There must be a ‘qualifying beneficiary’; one who has an interest in possession (right to income) in the trading company shares disposed of – referred to as a life tenant.
• In addition, that qualifying beneficiary must also personally hold at least 5% of ordinary shares in that trading company and must have done so for a period of at least two years, within the three years prior to disposal.
• They must also be an employee or director of the company.
If these conditions are satisfied, the trustees can then utilise the life tenant’s BADR relief on the gain realised by the trustees, on the sale of their shares. They effectively share the life tenant’s personal BADR lifetime limit, which currently stands at £1m.
The above summary has been most people’s understanding of the legislation, as it is clearly set out at s169J TCGA 1992. The HMRC Capital Gains Tax Manual at CG63985, however, has always expressed a contrary view which is in line with the recent decision.
Contrary view (the decision)
The effect of HMRC’s appeal to the Upper Tribunal is that the qualifying conditions set out above are extended further. The case found that, not only must the qualifying beneficiary have held the required 5% for at least two years, they must also have been a life tenant for a two-year period as well.
It is common practice to swap and change life tenants of trusts, to be able to direct income to different family members, as and when required. This could be achieved with no inheritance or capital gains tax implications for those trusts created after March 2006, providing a great deal of flexibility. Previously, as long as the life tenant who held the required 5% of shares was the life tenant of the trust at the date of sale, the trustees would attract BADR. This kind of flexibility has been curtailed by this recent decision.
Forbes Dawson view
This is a worrying case, not because of the outcome itself, but because the courts have tried to “ascertain the intention of Parliament as expressed in the words it has chosen…” and “within the permissible bounds of interpretation… give effect to Parliament’s purpose”. There is nothing in s169J that specifies that the life tenant has to have held his interest for at least two years.
As stated by the UK Supreme Court in 2019 and paraphrased here, “the starting point should be the legislation itself and applying an understanding of the natural and ordinary meaning of the words”. Unfortunately, this case seems to seek to understand the intention first and then try to fit the words to that intention.
Forbes Dawson have never sought to use the legislation inappropriately but there are instances where it has been advantageous to give interests in possession to other, non-qualifying beneficiaries, so they can receive income. We are now looking to revert the interest in possession to that qualifying shareholder beneficiary as quickly as possible, to start their two-year period.
If there is any danger of a sale within a two-year period and the life tenant has not been appointed in time, a possible solution is to appoint enough of the shares out of trust to that shareholder to utilise their full BADR limit. Provided they have held their personal 5% shareholding for the two year period, the newly received shares should also attract the relief. This may provide a neat solution in certain cases.
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