Quentin v HMRC
| Jurisdiction | England & Wales |
| Judge | Sir Launcelot Henderson,Lord Justice Snowden,Lord Justice Lewison |
| Judgment Date | 16 September 2022 |
| Neutral Citation | [2022] EWCA Civ 1222 |
| Docket Number | Case No: CA-2021-0007111 A3/2021/1394 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 1222
Lord Justice Lewison
Lord Justice Snowden
and
Sir Launcelot Henderson
Case No: CA-2021-0007111 A3/2021/1394
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE MICHAEL GREEN AND
UPPER TRIBUNAL JUDGE ANDREW SCOTT
Royal Courts of Justice
Strand, London, WC2A 2LL
Michael Firth (instructed by Direct Access) for the Appellants
Akash Nawbatt KC and Michael Ripley (instructed by the General Counsel and Solicitor for HMRC) for the Respondents
Hearing date: 7 July 2022
Approved Judgment
This judgment was handed down by the Judge remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be 10:30am on 16 September 2022.
INTRODUCTION
This appeal raises a short point on the construction of the provisions relating to entrepreneurs' relief contained in Chapter 3 of Part V of the Taxation of Chargeable Gains Act 1992 (“ TCGA 1992”), as they applied to certain disposals of trust business assets made by the trustees of three related family settlements (“the Trustees”) on 1 December 2015 (and thus during the 2015/16 tax year).
FACTS
The three settlements were made on 30 July 2015 between Quentin David Skinner as settlor, and himself and Barnabas Paul Clevely as the Trustees. The principal beneficiary of each settlement was one of the settlor's three sons, Rollo Skinner, Ludovic Skinner and Bruno Skinner, defined in each case as “the Life Tenant”. Apart from the identity of the Life Tenant, each settlement was in materially the same form. Subject to an overriding power of appointment in favour of a wider class of discretionary beneficiaries, the Trustees were directed to “hold the Trust Fund upon trust to pay the income to the Life Tenant during his lifetime”, with remainder to such of his children as should attain the age of 25 during a specified Trust Period, and with an ultimate default trust in favour of charity. The Trustees were also given a wide power to pay or apply for the benefit of the Life Tenant the whole or any part of the Trust Fund “in which the Life Tenant is then entitled to an interest in possession”.
The initial settled property was in each case £10, but on 11 August 2015, by three separate deeds of gift, the settlor gave 55,000 D ordinary shares in a company called DPAS Ltd (“DPAS”) to the Trustees of each settlement. We were informed that the business of DPAS involved the administration of insurance services for dentists. It is common ground that the 55,000 D shares given to each settlement thereupon became part of the Trust Fund, and that the Life Tenant was beneficially entitled to an interest in possession in the settled shares by virtue of his life interest. In the absence of any exercise of the overriding power of appointment, each Life Tenant had a present right of present enjoyment of the income of the D shares as and when it arose: see Pearson v Inland Revenue Commissioners [1981] AC 753, which was a decision on the meaning of “interest in possession” for the purposes of capital transfer tax (later inheritance tax), but nobody has suggested that the expression has a different meaning for the purposes of capital gains tax (“CGT”).
Each settlement's holding of D shares in DPAS was then sold by the Trustees, as I have said, on 1 December 2015. These were the disposals in respect of which claims to entrepreneurs' relief were in due course made on 31 January 2017. The claims were made jointly by the Trustees and the respective Life Tenants, as required by section 169M of TCGA 1992. However, the claims were eventually refused by HMRC, following the opening of enquiries into the relevant settlement tax returns, on the basis that each Life Tenant “had not held an interest in possession in the shares held by the trust for the requisite 12 month period”. If that was indeed a requirement of the legislation, it was clearly not satisfied: the Trustees had acquired the D shares by way of gift on 11 August 2015, and they then sold them less than four months later, on 1 December 2015. Accordingly, the interest in possession of each Life Tenant in the shares subsisted for much less than one year before the date of disposal.
If, however, it was not a requirement of the legislation, properly construed, that the Life Tenant's interest in possession in the shares had to subsist for a minimum period of 12 months, but only that such an interest should subsist at the date of disposal, then it is common ground that the relief was validly claimed. This is the short point which divides the parties, and which has led to different outcomes before the two tribunals below. The First-tier Tribunal (“FTT”), in a decision released by Tribunal Judge Guy Brannan on 6 August 2019 (“the FTT Decision”), allowed the Trustees' appeals against the relevant closure notices: see [2019] UKFTT 516 (TC), [2019] SFTD 1331. This decision was in turn reversed by the Tax and Chancery Chamber of the Upper Tribunal (Mr Justice Michael Green and Judge Andrew Scott), in a decision released on 11 February 2021 (“the UT Decision”): see [2021] UKUT 29 (TCC), [2021] STC 412. The Trustees now appeal to this court, with permission for a second appeal granted by the Upper Tribunal. The amount of tax at stake, depending on the outcome of the appeal, is approximately £1.75 million.
Before coming to the legislation, there are some further important facts which it is convenient to mention at this stage. Apart from his interest in possession in 55,000 D shares in DPAS under the relevant settlement, each Life Tenant had also owned 32,250 C shares in the company, in his own right, since 2011. The C shares conferred full voting rights, and it is common ground that this holding was sufficient to constitute DPAS the “personal company” of the Life Tenant within the meaning of section 169S(3) of TCGA 1992, which provides that:
“For the purposes of this Chapter “personal company”, in relation to an individual, means a company –
(a) at least 5% of the ordinary share capital of which is held by the individual, and
(b) at least 5% of the voting rights in which are exercisable by the individual by virtue of that holding.”
It is also common ground (see the FTT Decision at [18]) that each Life Tenant was an officer of DPAS, and that DPAS was a trading company.
LEGISLATION
Background
Chapter 3 of Part V of TCGA 1992 was inserted into the 1992 Act by way of amendment in 2008: see section 9 of, and Schedule 3 to, the Finance Act 2008. TCGA 1992 was itself a consolidation Act, described in its long title as “an Act to consolidate certain enactments relating to the taxation of chargeable gains”.
Part V of TCGA 1992 was headed “Transfer of Business Assets”. As originally enacted, it contained two Chapters. Chapter I consisted of general provisions, dealing with roll-over relief for replacement of business assets, appropriations to and from stock in trade, roll-over relief on the transfer of business to a company, and (in sections 163 and 164) “retirement relief”. Chapter II was headed “Gifts of Business Assets”. It provided for matters such as hold-over relief on gifts or other non-arm's length disposals of such assets made by individuals, including gifts to the trustees of a settlement.
The provisions relating to “retirement relief” in the original sections 163 and 164 of TCGA 1992, as supplemented by Schedule 6, were in many respects recognisable precursors of what was later to become entrepreneurs' relief. They included, for example, provisions relating to certain disposals by trustees, which may be traced back to their first introduction in the Finance Act 1985. But these provisions were all repealed in 1998, with effect for disposals in 2003/04 and later years, and replaced with taper relief for disposals of business assets, which then itself held the field until its repeal in 2008.
Apart from the abolition of taper relief, the new regime enacted by the Finance Act 2008 introduced a single rate of CGT of 18%. It also introduced entrepreneurs' relief. We were shown the Explanatory Notes to the relevant provisions of the Finance Bill 2008, which HMRC made available in response to a request by the Upper Tribunal for assistance on the legislative history of entrepreneurs' relief. Paragraph 124 of the Explanatory Notes stated that:
“The rules for entrepreneurs' relief are broadly based on the rules for the former retirement relief. But the rules for entrepreneurs' relief are simpler. For example, the amount of entrepreneurs' relief does not vary with the period of the individual's involvement with the business, and there is no minimum age limit for entrepreneurs' relief. Where the entrepreneurs' relief legislation uses terms that also appeared in the retirement relief provision (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 (as in the case of the definition of a trading company, where the entrepreneurs' relief legislation adopts the definition used for the purposes of taper relief).”
In my view, the assistance which we can derive from this Explanatory Note is very limited. While it may provide some insight into the drafting process of the entrepreneurs' relief provisions contained in the new Chapter 3 of Part V of TCGA 1992, our primary task must be to construe those provisions as a self-contained new statutory scheme in the wider context of the consolidation Act of which it now forms an...
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