Analysis
On 30 July 2015 Mr Ludovic Skinner (LS), Mr Rollo Skinner (RS) and Mr Bruno Skinner (BS) were given interests in possession under the L Skinner Settlement, the R Skinner Settlement and the B Skinner Settlement respectively in the whole of the settled property. On 11 August 2015 Mr Quentin David Skinner (QS) gave 55,000 D ordinary shares in DPAS Ltd to each of those settlements. LS, RS and BS had, since 2011, each held 32,250 C class shares with full voting rights in the company and were also officers of DPAS Ltd from at least 2011 onwards. On 1 December 2015 the trustees of the settlements disposed of the D ordinary shares.
The issue in the appeal was the availability of a capital gains tax relief, to trustees of an interest in possession trust where the trustees dispose of shares in a company held by the trust, under the Taxation of Chargeable Gains Act 1992: entrepreneurs’ relief.
The relief is available if there is a disposal of a trust business asset within the meaning of s169J Taxation of Chargeable Gains Act 1992. Subsection (4) requires the ‘relevant condition’ to be met, being that throughout a period of one year ending not earlier than three years before the date of the disposal, the company is ‘the qualifying beneficiary’s personal company’ as well as a trading company, and ‘the qualifying beneficiary is an officer or employee of the company’. Section 169J(3) provides that a ‘qualifying beneficiary’ is an individual with an interest in possession under the trust (other than for a fixed term). Section 169S(3) provides that a company is a personal company of an individual if that 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 the holding.
The FTT held that the qualifying beneficiary only has to hold an interest in possession under the trust at the time of the trustees’ disposal of the shares. HMRC appealed. The sole issue in the appeal was whether the qualifying beneficiary had to satisfy the definition throughout the same one-year period that the conditions in s169J(4) are 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.
Held (allowing the appeal):
A claim for entrepreneurs’ relief had to be made jointly by the trustees and the qualifying beneficiary (s169M(2)(a)). The amount of relief was linked to the availability of the qualifying beneficiary’s own £10m allowance, which was intended to reflect the fact that in many cases the beneficiary does benefit from the disposal of the shares forming part of the trust with the benefit of tax relief. However, this was not necessarily the case because the qualifying beneficiary does not always have an economic interest in the disposal, and the trustee cannot get any relief unless the beneficiary agrees. The qualifying beneficiary is able to veto a claim by the trustees, otherwise the use of a valuable tax relief could be reduced in circumstances in which the qualifying beneficiary does not in fact benefit or benefits to a limited extent. In the case of trustees, ss169N and s169O were relevant to the amount of relief available. In particular, s169O and s169J were the only provisions dealing specifically with trustee disposals, and their meaning should be consistent. Section 169O was not just an apportionment provision (paras 49-58).
Section 169J contains a definition of a ‘disposal of trust business assets’. It requires trustees of a settlement to make a disposal of ‘settlement business assets’ (ss169J(1)(a) and (2)), in the instant case meaning shares in a company which are part of the settled property. There must also be an individual who is a qualifying beneficiary. Section 169J(1)(b) directs the reader to s169J(3), which provides a definition of a qualifying beneficiary, being an individual who has an interest in possession under the settlement (other than for a fixed term) in the whole of the settled property or the part of it which consists of or includes the assets disposed of. Section 169(1)(c) sets out the relevant condition, in this case being s169J(4), which requires that, throughout a period of one year ending not earlier than three years before the date of the disposal, the company is ‘the qualifying beneficiary’s personal company’ and a trading company, and ‘the qualifying beneficiary is an officer or employee of the company’. Parliament had intended to import the definition set out in s169J(3) to s169J(4), thereby providing that the individual who was the qualifying beneficiary at the time of the disposal had to make the claim jointly with the trustees (paras 59-63).
Section 169O applies when there is at least one other beneficiary in addition to the qualifying beneficiary. The section could not, as a matter of ordinary language, be read as a proposition to the effect that the condition, to have an interest in possession, has to be met in relation to the other beneficiary at both the time of the disposal and also at the material time. It was engaged only in the case of a disposal of trust business assets, and its words merely told the reader that it was relevant to the trust case. It was assumed that the words ‘(in addition to the qualifying beneficiary) at least one other beneficiary who, at the material time, has’ the requisite interest, meant that at the material time, the qualifying beneficiary must also have an interest in possession in the trust (paras 78-81).
Parliament had provided for a relief to be available to the trustees, and had provided for the amount of the gain arising to the trustees to be set against the qualifying beneficiary’s £10m limit. This amounted to an effective transfer of a part of the qualifying beneficiary’s lifetime allowance to the trustees. Parliament intended this transfer to be premised on the existence of an enduring link between the qualifying beneficiary’s business and the interest in possession in the trust enjoyed by the qualifying beneficiary. Such a link is provided if there is a requirement in s169J for the beneficiary to be a qualifying beneficiary throughout the one-year period mentioned in s169J(4) (para 90).
JUDGMENT MICHAEL GREEN J AND JUDGE ANDREW SCOTT: Introduction [1] These appeals, brought with the permission of the First-tier Tribunal (Tax) (the ‘FTT’), concern a short point of statutory interpretation relevant to the availability of a capital gains tax relief to trustees of an interest in possession trust where the trustees dispose of shares in …