HMRC wins Skinner trust entrepreneurs’ relief caseby
A long running case concerning the entitlement of trust beneficiaries to entrepreneurs’ relief was decided by the upper tribunal. But that may not be the end of it, writes Chris Williams.
A trust that included shares in Quintin Skinner’s company DPAS was created in 2015. In December that year, the trustees disposed of those shares.
Entrepreneurs’ relief (ER) was, and business asset disposal relief (BADR) is, available to a trust if it holds shares in a qualifying beneficiary’s personal company. A trust is not entitled to any relief in its own right, but may claim (jointly with the beneficiary) a share of the beneficiary’s lifetime allowance.
A qualifying beneficiary must have an interest in possession (IIP) in the trust’s shares in the company that is not for a fixed time.
When the trust submitted a return claiming ER, HMRC opened an enquiry and issued a notice of determination to disallow ER. Its reasons were as follows:
- A beneficiary must also have had the requisite interest in possession throughout the period of at least one year ending within the three years preceding disposal.
- The Trustees claimed that there was no requirement for the beneficiary to have had the interest in possession for a complete year and he was only required to have the qualifying interest in possession at the time of disposal.
The trustees won their appeal before the first-tier tribunal, but that decision was overturned earlier this year when HMRC appealed to the upper tribunal.
The terms “qualifying beneficiary” and “personal company” are defined in separate sections of the Taxation of Chargeable Gains Act 1992.
- To be a beneficiary’s personal company the beneficiary had to own shares entitling them to at least 5% of:
- the (trading) company’s voting rights; and
- the company’s ordinary share capital.
for a period of at least one year ending within the three years preceding disposal (s 169S(3)).
- A qualifying beneficiary is defined as having an interest in possession under the trust otherwise than for a fixed term (s 169J(3)).
Legislative ambiguity or defect?
There is nothing in TCGA that specifies a minimum period of time in which the beneficiary must have held their IIP for the trust to be entitled to ER/BADR, but HMRC argued that it would not make sense if a trust could obtain ER granting an interest in possession immediately before disposing of the shares, relying only on the beneficiary meeting the qualifying period requirement in relation to their own shares.
The natural meaning
Barristers for HMRC argued that the two sections should be read together, taking s169J(3) as applying as if conditioned by and subservient to s169S(3). This seems quite a stretch when no connection is made between the two, but HMRC’s case picked up explanatory notes to the ER legislation in FA 2008 that stated that ER’s distant ancestor retirement relief treated personal and trustee shareholdings alike despite differences between the architecture of the two relief regimes.
Those notes say “where the entrepreneurs’ relief legislation uses terms that also appeared in the retirement relief provisions (sections 163 and 164 of and Schedule 6 to TCGA), they are intended to have the same meaning unless the entrepreneurs’ relief legislation specifically provides a different meaning”. But even so, was the UT right in doing so?
The judges certainly took great pains over their judgment, quoting past authorities that the duty of the court is to “ascertain the intention of Parliament as expressed in the words it has chosen” and “within the permissible bounds of interpretation… give effect to Parliament’s purpose”.
But the courts must not overreach themselves and try to give effect to what they perceive to be the purpose of the statute if their interpretation conflicts with the plain words of the statute. As recently as 2019 the UK Supreme Court has held that “...whatever the legal character of the document in question, the starting-point - and usually the end-point - is to find ‘the natural and ordinary meaning’ of the words there used, viewed in their particular context (statutory or otherwise) and in the light of common sense.”
The judges also stressed that they were considering how the trust rules sat in the whole of the ER rules package.
Overall the nagging thought is that the judges seem to have been concerned to seek to put the intention of the legislation as they saw it first, and then reconcile that objective with the conventional “plain words” interpretation as best they could. They will also have been conscious that the Court of Appeal and quite possibly the Supreme Court are likely to take a close interest in their reasoning.
The interpretation of the ER rules for trusts has been a lively source of contention ever since ER was introduced. A lot of taxpayers with skin in this particular game will have been disappointed by the UT’s decision. While some may have taken advantage of the plain interpretation of an IIP as a loophole, many others would have made legitimate planning and structuring decisions on that basis.
The upper tier Skinner decision is unlikely to rest undisturbed as ER lives on in its zombie form as BADR. And the government will probably have no interest in clarifying the legislative tangle unless the final decision favours the taxpayer.
Losers and non-losers
Apart from the need for certainty, the only winner from this decision is the public exchequer. No trusts will benefit (individually) from the UT decision, which only serves to restrict the scope of the relief and this case only affects trusts.
It is perhaps fortunate from the certainty standpoint that this case has come to the fore while there are still relatively large amounts of relief riding on ER under the obsolete £10m lifetime limit. With the lifetime limit for trust beneficiaries now set at £1m, very few trustees would now be prepared to take on the costs of litigation.
Watch this space.
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Chris Williams is a tax author, AccountingWeb contributor, co-editor with Satwaki Chanda of Bloomsbury's CGT reliefs for SMEs and contributor to Claritax Books. Main interests are Rugby (either code), motorbikes (volunteer bloodbiker) and crosswords. Lifetime ambitions: lead Wales to World Cup glory (hope fading); win IoM Senior TT (hopeless);...