Business Asset Disposal Relief (BADR, previously known as entrepreneurs' relief or ER) is a valuable relief for individuals and trustees holding certain business assets. It reduces the rate of capital gains tax (CGT) to 10% on up to £1m of qualifying gains, currently providing a maximum potential saving of £100,000. If CGT rates increase, as many are predicting may be likely in the foreseeable future to fund the Government's COVID-19 support measures despite not being a feature of the Budget issued on the 3rd of March, the relief will become even more valuable.
Trusts can qualify for BADR where:
- the trustees dispose of shares in a trading company;
- a beneficiary has an interest in possession (IIP) in those shares;
- for at least two (previously one) of the three years before the disposal:
- that beneficiary is an officer or employee of the company; and
- the company is that beneficiary's "personal company". This requires that they own at least 5% of the total share capital of the company, carrying at least 5% of the voting rights and entitlement to at least 5% of distributed profits and 5% of assets on a winding up.
The recent Upper Tier Tribunal (UTT) decision in HMRC v The Quentin Skinner 2005 Settlements [2021] UKUT 0029 (TCC) provides guidance on the application of the (now) 2-year holding period.
The facts of Skinner were as follows:
- three family members were officers of a family company;
- each held sufficient shares to meet the "personal company" requirements;
- they had met these criteria since 2011;
- in July 2015, each family member was given an IIP in a trust;
- in August 2015, shares in the company were given to those trusts; and
- in December 2015, the trustees sold the shares.
The beneficiaries had therefore had IIPs for five months, and the trustees had held the shares for four months, by the time of the sale. Did the trust qualify for ER?
The taxpayers argued that there was no need for the trusts to hold the shares, or for the beneficiaries to have IIPs in the shares, for a full year to qualify for ER. They claimed the 1-year holding requirement only applied to the "officer or employee" and "personal company" requirements, which had been met since 2011.
The UTT held that the trusts did not meet the criteria for ER, given the beneficiaries had not held their IIPs for a full year. The legislation, when read in the round, clearly presupposed and could only be applied logically if the beneficiary had an IIP throughout the holding period.
Although it was not necessary to decide the point, the UTT did comment that "it is at the very least arguable" that the trustees must also hold the shares for the full holding period.
ER has since been re-named BADR and the holding period extended from one year to two years, though the principles of Skinner continue to apply.
Trustees should therefore consider their potential CGT exposure well in advance of any planned business sale. If a good offer comes out of the blue or market conditions are right, it can be crucial to move quickly to secure the best sale price. This can lead to difficult decisions if the price is right but the CGT position is not.
Even where no sale is currently contemplated, trustees owning shares in trading companies should review whether they meet the qualifying criteria for BADR and, if not, if there is anything they should do now.
This is particularly pertinent for trusts holding shares in family businesses, where beneficiaries may already work for the company and meet the 5% personal shareholding requirement. As Skinner illustrates, this alone is not sufficient for BADR to apply to shares held in trust for the family.