Analysis
On 1 December 2015 three settlements (“the Skinner Settlements”) disposed of 55,000 ordinary shares (“the Shares”) in a company (“the Company”) at a gain. Under each Skinner Settlement a member of the Skinner family had been given an interest in possession in the whole of the settled property on 30 July 2015.
Following the disposal of the Shares, the Skinner Settlements and their respective Beneficiaries (“the Beneficiaries”) claimed entrepreneurs ‘ relief (“ER”) under s169J of the Taxation of Chargeable Gains Act 1992 (“TCGA 1992“) applying a reduced rate of CGT (10%) on gains qualifying for relief not exceeding £10m. HMRC issued closure notices to the effect that ER was not available, on the grounds that TCGA 1992, s169J(4) requires the beneficiary under the settlement in question to have an interest in possession (and therefore to be a “qualifying beneficiary”) throughout the period of 1 year. On that basis this requirement was not satisfied since the Beneficiaries had only held their respective interests in possession from 30 July to 1 December 2015. The Skinner Settlements and the Beneficiaries argued that there was no such requirement and that they were entitled to ER. They appealed to the First-Tier Tribunal, Tax Chamber.
There was no dispute that each of the Beneficiaries was a “qualifying beneficiary” at the time of the disposal of the Shares, as each of the Beneficiaries then had an interest in possession in the whole of the settled property for the purposes of TCGA 1992, s169J(3).
The sole dispute related to whether “the relevant condition” was satisfied. As the assets were shares in a company, the relevant condition under by virtue of TCGA 1992, s169J(4) is that, throughout a period of 1 year ending not earlier than 3 years before the date of the disposal –
(a) the company is the qualifying beneficiary ‘s personal company and is either a trading company or the holding company of a trading group, and
(b) the qualifying beneficiary is an officer of employee of the company or (if the company is a member of a group of companies) of one or more companies which are members of the trading group.
It was common ground that the Company was each of the Beneficiaries ‘ “personal company”, that they were each an officer of the Company, and that the Company was a trading company, throughout a period of 1 year ending not earlier than 3 years before the date of the disposal. The Company was the “personal company” of each Beneficiary throughout that period, for the purposes of TCGA 1992, s169S(3), as each Beneficiary had held at least 5% of the ordinary share capital and voting rights, by virtue of their personal holdings of 32,250 C class shares granting full voting rights, since 2011.
The sole dispute was whether TCGA 1992, s169J(4) contained a requirement for the beneficiary to have been a qualifying beneficiary for a period of 1 year ending not earlier than 3 years before the date of the disposal.
Held:
- 1) The appeal was allowed. The ordinary and natural meaning of the words in TCGA 1992, s169J(4) do not require a “qualifying beneficiary” to hold his or her interest in the shares disposed of for the period of 1 year ending not earlier than 3 years before the date of the disposal. It is the status of the qualifying beneficiary ‘s shareholding which constitutes the company as a “personal company”, and its status as “either a trading company or the holding company of a trading group”, that must exist in the 1-year period during the 3-year window.
- 2) TCGA 1992, s169J(3) provides a definition of a “qualifying beneficiary” by reference to the nature of his or her interest in the settlement business assets, i.e. an interest in possession (otherwise than for a fixed term) in the whole of the settled property, or a part of it which consists of or includes the settlement business assets disposed of. TCGA 1992, s169J(4) is the immediately following provision. The natural reading of the reference therein to “the qualifying beneficiary” is to a person who satisfies the definition in s169J(3). The focus of s169J(4) is not on the “qualifying beneficiary” at all, but rather on “the company”. What that sub-paragraph is aiming to do is to make it clear that during the specified period (the 1-year period ending in the 3-year window) the company must be a personal company (as to which see s169S) as well as being a trading company or a holding company of a trading group. The possessive reference to the “qualifying beneficiary ‘s” is simply identifying whose personal company it is: it must be the personal company of someone who is “a qualifying beneficiary”. The “qualifying beneficiary” does not have to have the attributes of a “qualifying beneficiary” for a period of 1 year during the 3-year window. That period and that window refer to the status as a personal company and as a trading company or a holding company of a trading group.
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