Trading company definition for ER

Sale of shares where company's only asset is FHL

Didn't find your answer?

I have been ploughing through the legislation and would appreciate if anyone could confirm (or disagree with) what I think.

Where an individual disposes of a Furnished Holiday Letting, this will qualify for entrepreneur's relief as it is specified by the legislation. Where shares in a company are disposed of, this disposal will qualify for ER provided that the company is a trading company (or in a trading group). Where the sole asset of the company is a FHL, as far as I can see the "deemed trading" rules for FHL do not apply in this instance, so the company will not qualify for ER. Is this correct?

Please assume that the property in question does qualify as a FHL.

Replies (29)

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By Ruddles
24th Oct 2017 13:59

It is not correct.

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By Rebecca Cave
24th Oct 2017 14:38

The company will be deemed to be trading if it actively runs a FHL business. The shares will qualify for ER, assuming the other conditions are met for the shareholder.

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Replying to Rebecca Cave:
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By Portia Nina Levin
24th Oct 2017 15:33

Where does your "actively runs" requirement come form Rebecca? Surely either the FHL definition is met or it is not, and either the activities that are not trading (after deeming FHLs to be trading) are substantial or they are not?

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By Ian Bee
24th Oct 2017 15:07

Thanks very much for the responses.

Where I was lost is in finding the relevant part of the legislation that brings FHL into the definition of "trading" for the purposes of ER on sale of shares in a company.

Can you direct me to the right section.

Thanks

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By michaelblake
27th Oct 2017 17:53

TCGA 1992 s241(3) and (3A)

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By Portia Nina Levin
24th Oct 2017 15:36

It has been discussed previously whether the deeming provision in s 241(3A) for the purposes of s 165 also applies for the purposes of s 165A which defines a trading company.

It is not clear - and this may be the reason for the OP's query - but I know that Ruddles and I consider that the reference to s 165 also extends to s 165A (which was once part of s 165).

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Replying to Portia Nina Levin:
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By Tax Dragon
25th Oct 2017 10:17

Thank you Portia. When this very question (ER on shares in a company with FHL) came up before, Ruddles was quite definite in saying it applied. On reading the legislation though I could see no step-by-step proof that it did (and Ruddles declined to provide one).

I think you have identified the reason for my doubt. And the fact that ER postdates s165A can't help the argument. There was a further missed chance to provide certainty when Sch7ZA came in. Reading the legislation as it stands now, I find it hard to conclude that ER applies.

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Replying to Tax Dragon:
By Ruddles
25th Oct 2017 10:38

I declined to provide step-by-step proof, because there is no step-by-step proof. That doesn't change my view, with which you are free to disagree with.

IMO, s165A needs to be read together with s165 - the provisions of s165A could just as easily have been included as additional sub-paragraphs to s165A. You appear to be concluding that because they weren't, this was intentional in order to exclude FHL company shares from ER. I take the contrary view. Ultimately, this will need to be settled by Tribunal or higher court.

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Replying to Ruddles:
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By Tax Dragon
25th Oct 2017 10:47

Likewise s241(3A) could refer to s165A as well as s165. It doesn't.

I'm glad though that we have at least now identified the point at issue. The way you were talking, it was not a matter of opinion/interpretation. I will have another read, now I know wherein our difference might lie.

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Replying to Tax Dragon:
By Ruddles
25th Oct 2017 11:04

My view, as already stated, is that s165A is simply an interpretative provision and is effectively part of, and needs to be read with, s165. There is therefore no need for s241(3A) to separately refer to s165A.

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By Portia Nina Levin
25th Oct 2017 12:25

Likewise, with the subject matter of s 165A having formerly been dealt with in a schedule (originally schedule 6, and subsequently schedule A1), to which s 165 then referred (the schedule also applying for other purposes), I can't see that s 165A can be viewed as anything other than an annexe to s165, such that any variant of the word trade in s 165A must be interpreted in the context of the extension of that word deemed for the purposes of s 165.

As Ruddles says, a tribunal's or court's interpretation might differ, but it seems unlikely.

Essentially, if you have provision A, B and C, which all rely on a definition in provision X as to what a widget is, and the widget definition includes "all manner of buggerits", and then there is provision Y that says for the purposes of provision B a buggerit includes a bodgit, then it seems to me that the proper way to then interpret provision X for the purposes of provision B is to read the words "all manner of buggerits (including bodgits)".

Looked at another way, if we are supposed to ignore s 165SA, then where in s 165 is the word trade mentioned in such a way that we need to apply the deeming provision in s 241(3) (or 241A(3))? And if the deeming provision is superfluous, why is it there?

The logic that s 241(3) does not apply when interpreting s 165A for the purposes of interpreting s 165 (to which s 241(3) does apply) makes no sense to me whatsoever.

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Replying to Portia Nina Levin:
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By Tax Dragon
25th Oct 2017 22:44

Thanks Ruddles, thanks Portia, for taking the time to expand.

If only there was something in statute [equivalent to the bracketed "(including bodgits)"] that said the extended definition of trade applied for the purpose of determining whether a company was a trading company. They do precisely that with the extension to commercial woodlands in s165(9), after all; why don't they make it so easy with FHL? [And the fact that they do this for the one and not for the other makes me (even) more nervous about the other.]

Your argument might justify a reporting position. But I wouldn't want to rely on it for planning.

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By Portia Nina Levin
25th Oct 2017 23:23

Actually, s 165(9) does not do the same very thing that s 241(3) doesn't. It says that trade includes something else for the purposes of s 165, but then does not mention s 165A.

Yet you appear to be happy that a company that occupies commercial woodland is a trading company?

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Replying to Portia Nina Levin:
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By Tax Dragon
26th Oct 2017 08:47

Your argument ref "trading" in s165A being "trading as extended by and for the purpose of s165" [I've removed your brackets] is hugely stronger regarding s165(9), as that includes the words "and in determining whether a company is a trading company for the purposes of this section". Those words would be rendered fairly meaningless if the extended meaning did not carry into s165A.

There are no words rendered meaningless if the extension provided by s241 did not carry into s165A. And it would be so easy for the legislators to ensure that the extended meaning did carry into s165A - by including reference to that section in s241(3A).

The failure to do that does leave an uncertainty. That's all I'm saying. You can infer that the extended meaning "must" apply in s165A all you like; you can appeal to common sense all you want to. But the legislation reads just as well without that extension, and it would be hard to argue with a court decision that decided it was not there.

I acknowledged that the uncertainty may be enough to file on the basis you set out. It's also enough to put me off relying on your interpretation for planning. But I said that already.

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Replying to Portia Nina Levin:
By Ruddles
25th Oct 2017 23:32

Another angle:

I think we’re all agreed that where the word ‘trade’ appears in s165 this includes a FHL business?

That being the case, and applying Tax Dragon’s argument, it follows that a company carrying on a FHL business using a property owned by the shareholder will be treated as carrying on a trade (s165(2)(a)) yet a company carrying on a FHL business via its own property will not (s165(2)(b)).

That, to me, is the height of absurdity and I do not believe for one second that that is what Parliament intended.

The most telling point for me, though, is the end of s165A(14). If s241(3) does not apply to s165A, then why is the definition of "trade" in s165A subject to s241(3)?

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By Tax Dragon
26th Oct 2017 08:54

Yes, the purposive argument is (IMO) your strongest.

The reference at the and of s165A(14) confuses me more regarding commercial woodland than it does re FHL, if I'm honest.

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Replying to Tax Dragon:
By Ruddles
26th Oct 2017 09:18

I think it is fairly obvious that a trading company, in the ordinary sense, is a company that carries on some form of trade (including, where relevant, FHL by virtue of s241). All that s165A does is confirm that a company will, even if carrying on such a trade, not be a trading company for the purposes of s165 if it carries on other non-trade (non-FHL) activities to a significant extent.

That is all that I'm going to say on that particular point. But, why do YOU think that subs. 14 refers to s241(3) if s241(3) is not extended to apply to s165A?

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By Tax Dragon
26th Oct 2017 09:42

Ruddles wrote:

I think it is fairly obvious that a trading company, in the ordinary sense, is a company that carries on some form of trade (including, where relevant, FHL by virtue of s241). All that s165A does is confirm that a company will, even if carrying on such a trade, not be a trading company for the purposes of s165 if it carries on other non-trade (non-FHL) activities to a significant extent.


Stop twisting legislation to suit your interpretation. Read what is says, then determine its meaning. Firstly, the "ordinary sense" is displaced by the definition provided by statute. Secondly, you know full well that that's not "all that s165A does".

You also know that you would interpret the section 'your' way irrespective of subs14. You're not seriously telling me you are hanging your entire interpretation on that one point?

My issue with you on this is your (apparent) certainty. Portia said “It is not clear - and this may be the reason for the OP's query - but I know that Ruddles and I consider that the reference to s 165 also extends to s 165A (which was once part of s 165).” I agree with that – it is not clear, but the two of you coincide on the interpretation.

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By Ruddles
26th Oct 2017 10:18

I'm not twisting the legislation to suit anything - simply stating how I happen to interpret the legislation.

"“Trading company” means a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities."

The rest of s165A is interpretative, so I stand by my earlier statement (save for the added bit about definition of "holding company" which is irrelevant to this discussion).

Let's cut to the chase - if you believe that s241(3) does not extend to s165A, why do you think that s165A refers to s241(3)?

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By Tax Dragon
26th Oct 2017 10:33

I think the better question is whether that reference is enough to impute the effect of s241(3) into s165A. If it is, we don't need to go to court - your interpretation is correct.

What I do find odd is that "trade" is defined in both s165 and s165A. Surely, if the s165 meaning simply carried over, s165A would not need its own definition? And, interestingly, s165(8) does not have the reference to s241(3).

FYI (as I seem to have confused you), I don't "believe" that s241(3) does not extend to s165A. This is not a matter of belief, but of reading. And I am starting to wonder (given what I have said in this post) whether ss14 does impute it. I can tell you I have seen far clearer imputations. (Absent that imputation, I don't see an extension.)

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By Tax Dragon
26th Oct 2017 11:04

Adding to that, it would have to be one helluva imputative provision, as it would need to mean, essentially: "s241(3) shall be taken to apply for the purposes of this section and s241(3A) interpreted accordingly, ie as if it referred to this section". That's a lot to read into "(subject to section 241(3))".

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By Ruddles
26th Oct 2017 11:21

So, again, why do you think the reference to s241(3) is there?

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By Portia Nina Levin
26th Oct 2017 11:58

I think you're reading way too much into what the legislation doesn't say, given the way that, and the frequency with which, it is hacked about to seek the policies of the Government of the day.

S 165A was simply cut and paste out of schedule A1 (including the "subject to s 241(3)" reference in 2008 when taper relief was abolished.

In turn, the part of schedule A1 dealing with trading companies and groups was cut and paste (with the ("subject to s 241(3)" reference being inserted) from schedule 6 in 1998 when retirement relief was being abolished and taper relief was introduced.

Prior to 1998, s 241(3) imported the extended definition of trade to include FHLs directly into schedule 6.

The 1998 changes also amended s 241(3) so that the former reference to schedule 6 linked into s 165, rather than directly into the new schedule A1; presumably with the intention of FHLs still being treated as a trade for the purposes of schedule A1 in connection with s 165 (given the added "subject to s 241(3)" reference in schedule A1), but not in connection with other purposes. That is how schedules work, they are like subroutines in a computer program.

S 241A was not then added until 2011, when the EU kicked up a fuss about the differing treatments, and changing the reference in s 165A may simply have been overlooked. Or that might have been left out on purpose, although that seems unlikely, given s 241A(3).

I think that the history of the provision, which is something a court will consider, where there is doubt, bears out an interpretation that imports the s 241(3) extension from s 165 into s 165A.

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By Tax Dragon
26th Oct 2017 12:09

I have seen the "the law used to say this, they didn't mean to change it" argument before. The relief in question (not FHL-related) was denied.

I agree there is doubt, consequently a purposive interpretation is in point and you (and Ruddles) lay out good reasons for supposing what that purposive interpretation would be.

I hope you are right. You are right about one thing - I am concerned about what the law does not say.

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By Portia Nina Levin
26th Oct 2017 12:46

Tax Dragon wrote:

I have seen the "the law used to say this, they didn't mean to change it" argument before. The relief in question (not FHL-related) was denied.

Denied by whom?

The history of a legal provision - both what has gone before, and what goes after - will be used by the courts as an aid to interpreting a statute, at any particular point in time, where it's meaning is not clear.

We are agreed that it is not clear from the current wording of the legislation whether it intends for FHLs do be included within the meaning of trade for the purposes of s 165A.

What can be clearly seen is that it was the clear intention of TCGA 1992 as originally drafted that FHLs were intended to fall within the meaning of trade under the then corresponding provision. The subsequent changes to the legislation are not suggestive of a desire, by the legislators, to alter that position, but rather are indicative of having made a pig's ear out of those changes.

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By Tax Dragon
26th Oct 2017 13:14

Portia Nina Levin wrote:

Denied by whom?


HMRC.

It was a wholly different set of provisions, and the change of meaning (intended or not) came about, as I recall, on a consolidation.

It's spilt milk, not relevant now.

I take your unintended consequences point. And perhaps I would now be prepared to plan accordingly (so, thank you to you & Ruddles) - but most definitely with a caveat if advising.

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Replying to Tax Dragon:
By Ruddles
26th Oct 2017 11:36

I agree that where/how 'trade' is defined is inconsistent. Simply a consequence of different draftsmen drafting the different parts of the legislation at different times.

But if, as you suggest, s165A stands on its own then it requires its own definition of trade. Which is indeed there, subject to s241(3). So, I'll ask you again - what do you think the reference to s241(3) does to the definition of 'trade' in s165A?

My firm view is that whilst s241(3) could indeed have referred to both s165 and 165A it doesn't need to because the reference at subs. 14 removes that need.

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By Tax Dragon
26th Oct 2017 12:00

Ruddles wrote:

My firm view is that whilst s241(3) could indeed have referred to both s165 and 165A it doesn't need to because the reference at subs. 14 removes that need.

We really have pinned this down now. You read the reference as imputative. As I said, it's a helluvan imputation, since you need also to read in the modification to s241(3A).
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Your repeated question (how do I read it?) is fair enough. I find the meaning far less clear than you. That's really all I can say. It might indicate a purpose, badly expressed (at least, IMO it's expressed badly, if that really is the purpose - especially since it would be so easy to make the intention clear by referring to s165A in s241(3A), or by saying the s165 definition also applies for s165A).

In the absence of clarity of meaning, I reach for purpose, and hope that the reference at least implies the purpose that you see expressed. But what for you is a "firm view" remains for me a "hope". And I prefer not to plan with fingers crossed.

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By Ian Bee
25th Oct 2017 10:02

Thanks Portia. That was the root of the problem but having looked at it again I agree with what you say about s165 and s165A

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