Quentin Skinner – shares sold by trust eligible for entrepreneurs' relief

In The Quentin Skinner 2008 Settlement L and others v HMRC [2019] UKFTT 516 (TC), the First-tier Tribunal (FTT) has held that for a trust to qualify for entrepreneurs' relief (ER) on a disposal of shares, it was not necessary for the trust's beneficiary to have had an interest in possession in the shares for the period prescribed in section 169J(4), Taxation of Chargeable Gains Act 1992 (TCGA).

Background

Three trusts were created in July 2015, each of which had a sole individual with an interest in possession in the whole of the settled property (the trusts). The beneficiaries of each trust were Mr Ludovic Skinner, Mr Rollo Skinner and Mr Bruno Skinner (the beneficiaries), respectively. 

In August 2015, Mr Quentin Skinner gifted ordinary shares in DPAS Limited to each of the trusts. The beneficiaries had each held shares in DPAS Ltd previously which granted voting rights, and DPAS Ltd was therefore a 'personal company' for each of them under section 69S, TCGA. 

The trusts subsequently disposed of the shares on 1 December 2015, and the trusts and the beneficiaries subsequently claimed ER in respect of the disposal on 31 January 2017.

HMRC denied the claim, on the basis that the beneficiaries had not held an interest in the possession in the shares held by the trusts for the requisite period of one year ending not earlier than three years before the date of disposal, as required by section 169J(4), TCGA (from 6 April 2019, the requisite period is two years).  

Section 169(J)(1) provides that there is a disposal of trust business assets where: (1) the trustees make a disposal of settlement business assets; (2) there is an individual who is a qualifying beneficiary; and (3) the relevant condition in subsections (4) or (5) is met. 

It was agreed that (1) and (2) were satisfied. The sole issue was whether section 169J(4) contains a requirement for the beneficiary to have been a qualifying beneficiary throughout a period of one year ending not earlier than three years before the date of the disposal.

FTT decision

The appeal was allowed.   

The appellants argued that section 169J(4) operated such that ER was available where a person had an 'entrepreneurial connection' with the company in question, which was to exist throughout a period of one year ending not earlier than three years before the date of disposal. Further, if Parliament had intended to require the person who was a qualifying individual at the time of disposal to have been so throughout the period referred to in section 169J(4), it would have said so. 

HMRC contended that a plain reading of section 169J(4) led to the conclusion that the individual had to be a qualifying beneficiary for the duration of the one year period. Further, if the appellants were correct, the condition could be satisfied by giving an individual an interest in the property immediately before the disposal and the requirement would be little more than a 'tick-box' exercise, which Parliament could not have intended. 

As there were no existing authorities on the correct interpretation of section 169J(4), the FTT gave the statutory language its ordinary and natural meaning when read in context and construed purposively. The FTT  noted that it was clear that Parliament intended to extend the ER one-year holding period to interests in possession under a trust, and therefore the requirement that the taxpayer hold shares in a 'personal company' which is a trading company, or the holding company of a trading group, should also apply to that shareholding. In the view of the FTT, Parliament's intention to impose an 'entrepreneurial connection' was clear. 

Further, the ordinary and natural meaning of the statutory language required qualifying beneficiaries to hold their interest in the shares disposed of for the period referred to in section 169J(4).   

Comment

This is the first decision on the correct interpretation of section 169J, TCGA and it is contrary to HMRC's interpretation of the legislation as set out in its Manual at CG63985.  It will therefore be interesting to see whether HMRC seek to appeal this decision to the Upper Tribunal.  

The decision can be viewed here.