Business Asset Disposal Relief for Trusts and Trustees – Introduction
Business Assets Disposal Relief (“BADR”), formerly known as Entrepreneurs Relief, is an important relief in the UK tax system.
The relief offers significant savings (though not as significant as it once did!) on capital gains from the sale of qualifying businesses.
Understanding BADR Eligibility
BADR is primarily accessible upon the sale of shares in a private trading company, assuming specific conditions are met.
A fundamental criterion is the notion of the “personal company.”
This concept encompasses individuals who have been directors or employees holding a minimum of 5% of the company’s shares for at least two years leading up to the sale.
Notably, before 2019, the required holding period was one year.
The scope of BADR also extends to trustees, particularly when dealing with life interest trusts.
Here, the relief is applicable if the trustees sell shares in a company that is the personal company of the life tenant — the beneficiary entitled to the trust’s income.
The catch, however, lies in meeting the personal ownership requirement of 5% of the shares by the life tenant.
Peter Buckley Settlement v HMRC – Background
The stringent nature of BADR’s conditions was starkly highlighted in the First Tier Tax Tribunal case of Trustees of the Peter Buckley Settlement v HMRC.
Here, in tax year 2015-16, the settlement lodged a claim for Entrepreneurs’ Relief (ER), now BADR, on the disposal of a solitary share in Peter Buckley Clitheroe Ltd (PBCL) dated 8 November 2015.
PBCL acted as a trading entity with Peter Buckley (PB) serving as a director from its inception until 9 November 2015.
The company’s equity was comprised of one Ordinary voting share initially allocated to PB but subsequently transferred to the settlement on 9 September 2012.
In January 2018, HMRC initiated an inquiry into the settlement’s ER claim and, by May 2021, issued a Closure notice.
This notice rejected the settlement’s ER claim and imposed an additional Capital Gains Tax (CGT) liability of £251,280.
HMRC contended that to legitimately claim ER on the share sale, PB was required to personally possess a minimum of 5% of PBCL’s shares for a year within the three-year period preceding the settlement’s share disposal, a criterion that was unfulfilled since the sole PBCL share was in the settlement’s possession since 2012, not in PB’s personal capacity.
The trustees appealed to the First Tier Tribunal (FTT).
The FTT Case
The FTT established that PB, in his capacity as a trustee of the settlement and not as an individual owner, held the sole PBCL share.
The trustees, despite having the authority to terminate the settlement in PB’s favor, did not execute this before 8 November 2015.
Consequently, the PBCL share was invested in the settlement immediately before its sale.
Given that PB did not personally own the PBCL share as mandated by s169S(3) TCGA 1992, HMRC’s rejection of the ER claim was justified.
The tribunal underscored that the legislative intent was clear: to qualify for ER, PB had to personally hold at least 5% of the shares and voting rights in PBCL for one year within the three years before the disposal, which he did not, leading to the disallowance of ER and the dismissal of the appeal.
The complexities of trust ownership and the stringent requirements of BADR converged to result in the trustees being denied relief on the sale of company shares, leading to a significant tax liability.
This case serves as a crucial reminder of the meticulous planning required when considering shareholding structures, especially in the context of trusts.
Business Asset Disposal Relief for Trusts and Trustees – Conclusion
In conclusion, while BADR presents a valuable opportunity for tax savings, its intricate conditions and interplay with trust structures underline the need for diligent planning and expert guidance.
As entrepreneurs and trustees seek to navigate these waters, proper tax advice remains key.
Final thoughts
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