Quentin Skinner – shares sold by trusts not eligible for entrepreneurs' relief
In HMRC v The Quentin Skinner 2005 Settlement L and others [2021] UKUT 29 (TCC), the Upper Tribunal (UT) held that, for the purposes of entrepreneurs' relief (ER) (now business asset disposal relief), section 169J(4), Taxation of Chargeable Gains Act 1992 (TCGA), requires a beneficiary to have been a qualifying beneficiary throughout a period of one year ending no earlier than three years before the date of disposal of settlement business assets by the trustees.
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.
Legislation
The relief is available only if there is a disposal of trust business assets within the meaning of section 169J, TCGA, which requires “the relevant condition” set out in subsection (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 by 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 First-tier Tribunal (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.
HMRC appealed.
UT decision
The appeal was allowed.
The UT found that section 169J(4) did require a beneficiary to have been 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, section169O(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". It did not merely identify whose personal company it was. Other provisions concerning ER demonstrated that Parliament had understood the need to distinguish between qualifying beneficiary and 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.
Comment
The UT's decision will come as a disappointment to many taxpayers. It confirms HMRC's view of section169J(4) (as set out in its Capital Gains Manual at CG63985) that a qualifying beneficiary must have an interest in possession throughout the relevant period.
The decision will no doubt come as a relief to HMRC, as it had expressed some concern that the FTT's decision would have enabled, where family trusts and companies are concerned, an entitlement to business asset disposal relief to be created by simply appointing an interest in possession for an individual shortly before shares are disposed of and terminating that interest shortly thereafter.
The decision can be viewed here.