Entrepreneurs' relief not available for disposal of syndicate capacity by a Lloyd's name
In Carver v HMRC [2015] UKFTT 0168 (TC), the First-tier Tribunal (FTT), has provided helpful guidance on the key requirements of entrepreneurs' relief (ER), under section 169H, Taxation of Chargeable Gains Act 1992 (TCGA).
Background
Mr Carver (the Appellant) is an underwriter at Lloyd's (a Lloyd's Name), who underwrites risks through syndicates. He participated in 18 different syndicates and ER was claimed in respect of a disposal of syndicate capacity in syndicate 958. To carry on trade, a Name requires the following:
- funds at Lloyd's;
- capacity in a syndicate; and
- a contract with the Managing Agent of that syndicate who, amongst other things, advises the Name and conducts the business of the syndicate.
The relevant legislation relating to ER is found in section 169H TCGA, which provides, so far as relevant, as follows:
"(2) The following are qualifying business disposals– (a) a material disposal of business assets: see section 169I, ....
(3) But in the case of certain qualifying business disposals, entrepreneurs' relief is given only in respect of disposals of relevant business assets comprised in the qualifying business disposal: see sections 169L."
Section 169I defines "material disposal of business assets" as:
"(1) There is a material disposal of business assets where – (a) an individual makes a disposal of business assets ... (2) ... a disposal of business assets is – (a) a disposal of the whole or part of a business, (b) a disposal of (or of interests in) one or more assets in use, at the time at which a business ceases to be carried on, for the purposes of the business ...".
The Appellant claimed ER on the basis that the disposal of his syndicate capacity was a disposal of a "part of a business", pursuant to section 169I(2)(a) TCGA. He claimed that each syndicate which he participated in represented a separate business.
HMRC rejected the Appellant's claim for ER and issued a closure notice which resulted in an additional capital gains tax charge of £19,623.30.
The Appellant appealed to the FTT.
FTT's decision
The Appellant relied on Gilbert v RCC [2011[ UKFTT 705 (TC), in support of his case. In Gilbert, the FTT held that ER was available on the basis that the portion of the business sold as a going concern was "recognisable as a business even when separated from the whole". In that case, premises, where business was carried on before and after the sale of the business, were not included in the disposal.
HMRC submitted that the disposal of syndicate capacity did not fall within either section 169I(2)(a) or (b). It relied upon the following definition of "part of a trade", provided in Maco Door and Window Hardware (UK) Ltd v HMRC [2008] STC 2594:
"... a viable section of a composite trade which would still be recognisable as a trade if separated from the composite whole".
HMRC argued that holding capacity alone does not constitute the underwriting trade, it is merely an asset.
Similarities were drawn between the Appellant and a farmer who had sold nine out of 89 acres of farmland in Atkinson v Dancer [1988] STC 758. As the Appellant continued to retain capacity in other syndicates, HMRC considered the disposal of capacity in syndicate 958 to be a reduction in the scale of the business, but it did not constitute disposal of all or part of it.
The FTT was of the view that the capacity in syndicate 958 was a means through which the Appellant was able to carry on a trade. It was therefore an asset of the business, but it did not constitute the trade or business itself. The FTT likened it to goodwill of a business and the small portion of the overall land sold in Atkinson. Accordingly, the FTT concluded that the disposal did not qualify for ER and the appeal was dismissed.
Comment
Unfortunately for the Appellant, the FTT was of the view that syndicate capacity was an asset used by the individual in his business rather than a part of his business. Therefore, a part disposal of syndicate capacity was not a disposal of part of a business under section 169I(2)(a) TCGA. Because the syndicate capacity alone was not a viable section of the business from which it was carved out, there was no sale of a business as a going concern as in Gilbert.