Tax advisers are grappling with a clampdown on the ability of trusts to take advantage of capital gains tax “entrepreneurs’ relief” (ER) on the disposal of shares in a company. Although there’s nothing in the legislation to support their approach, HMRC are vigorously defending a restrictive interpretation of the tax rules.
According to the legislation, a disposal of shares by trustees may be eligible for ER where a beneficiary of the trust has an “interest in possession” in all of the trust assets or the part that consists of the business assets being sold. An interest in possession is, broadly speaking, an immediate right to the income of the trust.
The following conditions must also be fulfilled:
The beneficiary must have 5% or more of the shares in the company
The beneficiary must be an officer or employee of the company
The company must be trading
The beneficiary must have both worked and held 5% of the shares for over two years (this period was one year prior to 6 April 2019).
The legislation doesn’t require the beneficiary to have had an interest in possession for any minimum time. Alert tax practitioners have long been aware of the fact that, thanks to the flexibility of many trusts, it’s sometimes been possible for trustees to maximise availability of ER by “parachuting in” a qualifying beneficiary immediately prior to a sale by giving them an IIP in the trust.
Unsurprisingly, HMRC think there should be a minimum time for which a beneficiary has had an interest in possession, as well as a minimum time for them to have worked for the company and had a 5% shareholding. HMRC’s ER guidance states that the qualifying two year period should apply to the interest in possession, and they have been defending this position in recent ER claims by trustees.
There’s nothing to suggest that such a condition should be implied, except HMRC’s wish to close a perceived loophole in the legislation. In light of HMRC’s approach and until the matter is resolved, trustees and their advisers should consider their options well in advance of a potential sale so they can maximise ER without a potential challenge from HMRC
Published: June 2019
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