Revenue and Customs Commissioners v Quentin Skinner 2005 Settlement L and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 February 2021 |
| Neutral Citation | [2021] UKUT 29 (TCC) |
| Year | 2021 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 29 (TCC)
Mr Justice Michael Green, Judge Andrew Scott
Upper Tribunal (Tax and Chancery Chamber)
Capital gains tax – Entrepreneurs' relief – Whether beneficiary must be a qualifying beneficiary throughout a period of one year ending not earlier than three years before disposal – Yes – Appeals allowed.
The Upper Tribunal allowed HMRC's appeal against the FTT's finding that entrepreneurs' relief (now business asset disposal relief) was available on a trustee disposal where the qualifying beneficiary had an interest in possession at the time of disposal but not throughout the one year period throughout which the qualifying condition in s. 169J(4) had to be met.
The appellants were three separate trusts created by Quentin Skinner (the settlor). On 30 July 2015, three individuals (the beneficiaries) were given an interest in possession in the whole of the settled property in their respective trust. In August 2015, the settlor added 55,000 D ordinary shares in DPAS Ltd to each trust. DPAS Ltd had been a personal company in relation to each beneficiary since 2011 by virtue of their holdings of C ordinary shares and as officers of the company. In December 2015 the trusts disposed of the shares.
The FTT had held that the conditions in s. 169J were satisfied because, in relation to each settlement, there was a “qualifying beneficiary” and the personal company and officer/employee requirements in s. 169J(4) were satisfied by each beneficiary for at least one year (as was then required) ending in the three years before disposal. It was not necessary for the beneficiary to have been a “qualifying beneficiary” throughout that one-year period.
The Upper Tribunal found that the FTT had made an error in law and that s. 169J(4) requires a beneficiary to have been a qualifying beneficiary throughout the one-year period in which the other relevant conditions have to be met. Their reasoning was as follows:
- On textual analysis of s. 169J(4), if the FTT's interpretation were correct, the Upper Tribunal could see no need for the concept of a qualifying beneficiary, as the section could simply have stated that there had to be an individual with an interest in possession in the relevant property. On their analysis it was only necessary because it formed part of the condition in s. 169J(4). They did not accept the FTT's view that the use of the term qualifying beneficiary in s. 169J(4) was simply a means of identifying the individual concerned.
- It was not correct (as the FTT had stated) that s. 169O was simply an apportionment provision – in the Upper Tribunal's view it performed an important function as it was the only other provision dealing specifically with trustee disposals. They also disagreed with the appellants' further argument that the opening words of s. 169O(1) – on a disposal meant that the qualifying beneficiary test had to be applied at the time of disposal. In their view, the words on the disposal meant in the case of a disposal and that further reference to the material time (being the end of the one year period referred to in s. 169J(4)) in s. 169O clearly indicated that the latter section was assuming the qualifying beneficiary had an interest in possession at that time.
- In terms of the policy behind entrepreneurs' relief, the Upper Tribunal also considered that the requirement for a beneficiary to be a qualifying beneficiary throughout the one-year period mentioned in s. 169J(4) had the effect of linking the qualifying beneficiary's business with his interest in the trust which must have been parliament's intention. It would otherwise, particularly in the case of a family trust, be possible to obtain relief on any shares held simply by appointing an interest in possession to a person who satisfied s. 169J(4) shortly before the shares were sold.
The case also highlights further difficulties in interpreting the business asset disposal relief (formerly entrepreneurs' relief) provisions applicable to trustee disposals; namely, whether the trust has to own shares in the company throughout the one-year period referred to in s. 169J(4) and whether the actual assets disposed of need to be held in the trust throughout that period. The Upper Tribunal thought that both these issues should be left for determination in a case where they might affect the outcome.
Mr Thomas Chacko, instructed by the General Counsel and Solicitor for HM Revenue & Customs, appeared for the appellants
Mr Michael Firth, counsel, appeared for the respondents
[1] These appeals, brought with the permission of the First-tier Tribunal (Tax) (the “FTT”), concern a short point of statutory interpretation relevant to the availability of a capital gains tax relief to trustees of an interest in possession trust where the trustees dispose of shares in a company held by the trust. The relief in question is entrepreneurs' relief as provided for by Chapter 3 of Part 5 of the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”). (References below to sections are, unless otherwise stated, to sections of TCGA 1992.)
[2] The relief is available only if there is a disposal of trust business assets within the meaning of s.169J. That section requires “the relevant condition” set out in subsection (4) to be met in the case of a disposal of shares in a company. The relevant condition is that, throughout a period of one year ending not earlier than three years before the date of the disposal, the company is “the qualifying beneficiary's personal company” as well as a trading company, and “the qualifying beneficiary is an officer or employee of the company”. A company is a personal company of an individual if the individual held at least 5% of the ordinary share capital of the company and at least 5% of the voting rights as a result of that holding (s.169S(3)).
[3] A “qualifying beneficiary” is defined by s.169J(3) as an individual with an interest in possession under the trust (otherwise than for a fixed term). The sole issue in this case is whether the qualifying beneficiary has to satisfy that definition throughout the same one-year period that the conditions in s.169J(4) are met or whether it is sufficient for the qualifying beneficiary to have their interest in possession under the trust at the time of the disposal.
[4] In its decision, which is reported at [2019] TC 07312 (the “Decision”), the FTT (Judge Brannan) held against HMRC that the qualifying beneficiary only has to hold an interest in possession under the trust at the time of the trustees' disposal of the shares. This was the critical issue in the case because it was common ground that the relevant individual beneficiaries satisfied the conditions in s.169J(4) for the requisite period but they only held interests in possession in their respective settlements for a period of about 4 months up to the date of disposal.
[5] The material facts were not in dispute and are taken from the Decision:
- on 30 July 2015 Mr Ludovic Skinner, Mr Rollo Skinner and Mr Bruno Skinner were given interests in possession under the L Skinner Settlement, the R Skinner Settlement and the B Skinner Settlement respectively in the whole of the settled property;
- on 11 August 2015 Mr Quentin David Skinner gave 55,000 D ordinary shares in DPAS Limited to each of those settlements;
- Mr Ludovic Skinner, Mr Rollo Skinner and Mr Bruno Skinner had each held 32,250 C class shares with full voting rights in the company since 2011 (so that DPAS Ltd was a personal company of each of them); they were also each officers of DPAS Ltd from at least 2011 onwards; and
- on 1 December 2015 the trustees of the settlements disposed of the D Ordinary shares.
[6] Before turning to the specific legislation in relation to entrepreneurs' relief, we think it is instructive to look at the history of similar reliefs that were previously available but were ultimately superseded by entrepreneurs' relief. We had no oral submissions on this at the hearing but we invited both parties' Counsel to provide written submissions to us on the history.
[7] Relief for disposals of business assets has been a long-standing feature of the capital gains tax code. Since its introduction in 1965, retirement relief sought to alleviate the tax consequences of a disposal by an individual of business assets on retirement. The relief was linked to the age of the person making the disposal (hence its name).
[8] Until 1985 the relief was not available to trustees. In a consultation conducted by the then Inland Revenue in March 1984 there was (at [14]) a proposal to change that:
The relief does not apply to property held in settlement. However, it can be maintained that, in general, property held in trust should be treated for CGT purposes as far as possible in the same way. There is therefore a case for extending the relief to cover the disposal by trustees of business assets used in a business carried on by a qualifying beneficiary who has more than a discretionary interest.
[9] That led to the inclusion in the Finance Act 1985 (“FA 1985”) of provisions (s.70 and Sch. 20) which, among other things, conferred a new entitlement to retirement relief on trustees for certain disposals.
[10] Section 70 of FA 1985 provided as follows so far as relevant to the disposal by trustees of shares in a company:
(3) Relief from capital gains tax shall be given, subject to and in accordance with Schedule 20 to this Act, where–
- the trustees of a settlement dispose of–shares or securities of a company, or […]
- the conditions in subsection (4) […] below are fulfilled with respect to a beneficiary who, under the settlement, has an interest in possession in the whole of the settled property or, as the case may be, in a part of it which consists of or includes the shares or securities or the asset referred to in paragraph (a) above...
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