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Entrepreneurs Relief - a BAD Relief for trustees?

Posted on 24 January 2024

Many readers will know that Entrepreneurs Relief (ER), now known as Business Assets Disposal Relief (BADR), allows capital gains on the sale of a qualifying business to be taxed at just 10% rather than the much higher standard rate of Capital Gains Tax (CGT). The relief was particularly important when it applied to gains of up to £10m but even now, when the BADR lifetime allowance is capped at £1m, it can still provide a tax saving of up to £100,000 (or potentially £200,000 for married couples and civil partners).

The relief is generally available on the sale of shares in a private trading company provided various conditions are met including the requirement for the company to be the selling individual's "personal company". That broadly means the individual was a director or employee of the company and owned at least 5% of the shares for at least two years up until the sale (before 2019 the required holding period was just one year).

The relief is also extended to sales by trustees. In that case, relief is available if the trust is a life interest trust, and the trustees sell shares in a company which is the personal company of the life tenant (i.e. the beneficiary with the right to the trust income). In other words, provided the life tenant was a director or employee of the company and owned 5% of the shares personally for the required period, any other shares in the company owned by the trust should (also) qualify for relief.

This last condition proved an insurmountable problem for trustees as reported in the recent First Tier Tax Tribunal case of Trustees of the Peter Buckley Settlement v HMRC. Mr Buckley was the creator and a trustee of the Peter Buckley Settlement. He was also the life tenant of the trust. On his death, his daughter would be entitled to all of the trust assets. The trust owned 100% of the shares in Peter Buckley Clitheroe Limited and Mr Buckley had been a director of the company for many years. In fact, there was only one issued share, which the trustees sold in 2015 for just under £1.5m, most of which represented capital gain. The trustees claimed relief on their gain, but HMRC rejected the claim on the basis that the company was not Mr Buckley's personal company. Mr Buckley did not own any shares in the company in his personal capacity and so he did not own the 5% necessary to make it his personal company. That meant the trustees were not entitled to relief when they sold the only share in the company. Had the trust's one share been divided into, say, 100 shares, with 5 of those shares distributed from the trust to Mr Buckley personally at least one year before the sale, not only would Mr Buckley have been entitled to relief on his 5% holding but so would the trustees on their 95% shareholding. Since the standard CGT rate at the time was 28% compared to the 10% ER rate, this cost the trustees more than £250,000 of tax.

Holding family company shares in trust is often recommended for succession and protection reasons. With an impending general election, there are also sound inheritance tax (IHT) reasons for doing so in case current generous IHT reliefs are scrapped or restricted. But care is needed when considering the interaction between BADR and trustee ownership, particularly where a company sale is expected in the near future. BADR is a generous relief, but its conditions are notoriously strict and often difficult to fathom. The Tax Tribunal case reports are littered with failed claims where one or more of the BADR conditions were not met. This is an area where specialist advice is needed sooner rather than later, as an unexpected sale at an attractive price can happen quickly in circumstances where the buyer won't wait for the seller to re-organise their shareholding to benefit from maximum BADR.

For further advice on BADR and the creation of trusts to hold private company shares, please contact Andrew Goldstone.

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