A recent First Tier Tribunal case found that trustees of a UK resident trust were entitled to pay CGT at 10% rather than 20% on a disposal of shares, READ MORE because they qualified for Entrepreneurs’ Relief (“ER”) in a circumstance where HMRC’s guidance says that no relief is available. In the course of the hearing, Counsel for HMRC said that if their opponent was correct, trustees could take action immediately before the disposal to obtain the tax relief.
The case concerned a situation where an individual who met the ER conditions for his own disposal of shares on the sale of a trading company was also a beneficiary of a trust which held shares in the company. The individual had been given an interest in possession in the trust before the trustees sold the shares, but less than a year before that sale. The judge held that on a plain reading of the legislation, it was not necessary for the individual to have held the interest in possession for the year before the sale, and so the trustees were entitled to the relief.
Thus, before a sale of shares in a trading company (or the holding company of a trading group), trustees of a discretionary trust can, where the trust deed permits, give an interest in possession to such an individual, and claim relief from Capital Gains Tax. Note that giving the interest in possession doesn’t give that individual rights in relation to the proceeds of sale, which are capital. It would give the individual the entitlement to investment income realised on the proceeds. Note also that property development companies can qualify as trading companies, and that companies which meet the conditions for furnished holiday lettings can also qualify, so the effect of a claim to Entrepreneurs’ Relief could be a tax reduction of 18% not just 10%.
So, trustees should consider this, and also ensure that they consider whether there could be any adverse tax consequences of taking such an action. Trustees of non-UK resident trusts which are settlor-interested should note that James Kessler QC considers that trustees of a trust within s86 can claim Entrepreneurs’ Relief. We would be happy to advise on this.