Business asset disposal relief (BADR; previously known as entrepreneurs’ relief (ER)) is a valuable and much sought-after capital gains tax relief. However, the conditions for claiming the relief are often problematic.
For an individual shareholder disposing of shares in a company, the most common condition for relief is that throughout a two-year period ending with the date of disposal, the company is the individual’s ‘personal company’ and a trading company (or the holding company of a trading group), and the individual is an officer or employee of the company (or trading group member) (TCGA 1992, s 169I(6)).
The definition of ‘personal company’ (in TCGA 1992, s 169S(3)) refers to holding at least 5% of the company’s ordinary share capital, which satisfies certain criteria (e.g. as to voting rights). This two-year holding period was increased from one year, from 6 April 2019.
Trustees and BADR
BADR is generally not available to trustees of a settlement. However, there is an important exception where three conditions are satisfied (TCGA 1992, s 169J):
- The trustees dispose of settlement business assets;
- An individual is a ‘qualifying beneficiary’ (i.e. an individual who, under the terms of the settlement, has an interest in possession (other than a fixed term one) in the whole or relevant part of the settled property); and
- One of two ‘relevant conditions’ (i.e. one relating to shares or securities, the other relating to assets used in a business) is satisfied.
The ‘relevant condition’ for shares is that throughout a two-year period ending not earlier than three years up to the date of disposal the company was the qualifying beneficiary’s ‘personal company’, the company was a trading company (or the holding company of a trading group), and the qualifying beneficiary was an officer or employee of the company (or trading group member).
Does this mean that the qualifying beneficiary must have the interest in possession for at least two years?
In The Quentin Skinner 2005 Settlement L & Ors v Revenue and Customs  UKFTT 516 (TC), in July 2015 three beneficiaries were each given an interest in possession in a settlement in their own names, in the whole of the settled property. In August 2015, the settlor gave ordinary ‘D’ shares in a company to each of the three settlements. The company was already the ‘personal company’ of the beneficiaries as they had held other (‘C’) shares since 2011 and were officers of the company.
In December 2015, the three settlements disposed of the shares, and the trustees and beneficiaries claimed ER. However, HM Revenue and Customs (HMRC) refused the ER claims as each beneficiary had not held an interest in possession in the shares held by the trusts for the (then) required one-year period.
The First-tier Tribunal held that it was the status of the qualifying beneficiary’s shareholding that constituted the company as a ‘personal company’ and its trading company status that must have existed in the one-year period during the three-year window. The appellants’ appeal succeeded.
The tribunal’s decision indicates a potential shortcut to obtaining BADR in certain circumstances involving shares held in trust. However, this is subject to any appeal by HMRC and/or changes affecting the BADR legislation.
The above article was first published in Tax Insider (February 2020) (www.taxinsider.co.uk).