Kevin Read points out that the Court of Appeal has recently clarified the conditions for trustees seeking to claim business asset disposal relief for capital gains tax purposes.
There are many reasons for setting up trusts, even without considering their creation for tax planning purposes.
For example, trusts can provide protection of assets on divorce or bankruptcy. Putting family company shares into trust can allow decisions as to who will eventually get those shares to be deferred (e.g., so that they might be eventually appointed out to those who are more involved with the business).
The inheritance tax rules of trusts are very complex; no trust transactions should be entered into without taking appropriate advice. I am not going to discuss these issues in this article. Instead, I will concentrate on capital gains tax (CGT) business asset disposal relief (BADR) and will assume that shares to which I refer are in a qualifying trading company for BADR purposes (BADR was previously known as entrepreneurs’ relief).
Discretionary trusts
These are probably the most common trusts used to hold family company shares. However, no BADR will be available when the trustees dispose of such shares, even if all the beneficiaries work for the company and own shares in it themselves.
However, the legislation does allow BADR for trustees of interest in possession (IIP) trusts (called liferent trusts in Scotland) if various qualifying conditions are met.
BADR: TCGA 1992, s 169J
This allows BADR to be available on the disposal of certain trust assets. For BADR to apply, a ‘qualifying beneficiary’ (QB) must have an IIP (not for a fixed term) in the whole of the settlement assets, or in a part of it which consists of or includes the settlement business assets disposed of.
On a disposal of shares, throughout a period of two years ending within the three years prior to disposal, the company must be the QB’s personal company (i.e., they own at least 5% of the ordinary share capital and votes, etc.). The QB must also be an officer or employee of the company.
Any claim for BADR by trustees must be a joint claim with the QB, as it uses up part of the beneficiary’s £1 million lifetime allowance.
The Quentin Skinner 2015 Settlements v HMRC [2022] EWCA Civ 1222
- On 30 July 2015, Ludovic, Rollo and Bruno Skinner were granted IIPs in three separate settlements.
- In August 2015, Quentin Skinner gave 55,000 ‘D’ ordinary shares in his company to each of the three settlements.
- The beneficiaries, his children, had each held 32,250 ‘C’ class shares, granting full voting rights since 2011, i.e., 5.78% of the company’s ordinary share capital each; thus, the company was a ‘personal company’ for each of them.
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On 1 December 2015, less than four months later, the trustees of the settlements sold the shares and claimed entrepreneurs’ relief.
EWCA decision
The identification of a QB requires an examination at the date of the disposal. There is no requirement in s169J(3) that the individual must have had the IIP for any minimum period, only that the IIP should exist at the time of the disposal.
TCGA 1992, s 169O, referred to by the Upper Tribunal when allowing HMRC’s appeal, is an apportionment provision. It is relevant (only in certain cases) after a disposal of trust business assets within s 169J has already been identified. Section 169O only applies where there is more than one beneficiary with an IIP. It was irrelevant to the instant case.
The trustees’ appeal was allowed.
Practical tip
To protect the availability of BADR on shares held by trustees, the settlor should make sure that enough qualifying shares (at least 5%) are owned directly by a beneficiary with an interest in possession, who is also an officer or employee of the company.
