07 January 2020

Entrepreneurs' Relief and the 'qualifying beneficiary' requirement: is it now the time to act?


Over recent months, calls for Entrepreneurs’ Relief (ER) to be scrapped have multiplied and intensified. The Institute for Fiscal Studies, the Association of Accounting Technicians as well as the former chair of HMRC, Sir Edward Troup, have all raised questions over the future of ER during the recent election campaign.

Is it therefore time to act?

What is ER?

ER reduces to 10% (from 20%) the rate of Capital Gains Tax (CGT) that is paid when some or all of a business is sold. It is available to most individuals, qualifying beneficiaries and some trustees of settlements, subject to a number of conditions. There is lifetime limit of gains which qualify for ER, which is currently £10M.

Broadly, to qualify for ER, an individual must be a sole trader or business partner and have owned the business for at least two years. When selling shares or securities, for at least the preceding two years, the individual must be an employee or office holder of the company, whose activities are in trading and which qualifies as a ‘personal company’ – this means that the individual must hold at least 5% of shares and voting rights and be entitled to at least 5% of either the profits on distribution and assets on winding up or disposal proceeds if the company is sold.

The ‘qualifying beneficiary’ requirement…

ER is also available to trustees when they dispose of ‘settlement business assets’, that is assets settled in trust that have been used for the purposes of a business, where there is a ‘qualifying beneficiary’. A qualifying beneficiary is one with an interest in possession in the settlement business assets who satisfies all the ER qualifying conditions for a period of two years ending not earlier than three years prior to the disposal of such assets.

Contrary to HMRC’s published view on the point, a recent case (Quentin Skinner 2005 Settlement L and others v HMRC [2019] UKFTT 516 (TC)) has confirmed that, for ER to apply when trustees dispose of business assets, the qualifying beneficiary needs an interest in possession only at the date of disposal – i.e. not throughout the full two-year period, although this remains relevant in respect of the other qualifying conditions relating to both the trading and ‘personal’ nature of the company being disposed of and the length of the employment or office held by the beneficiary in question.

and some planning opportunities…

Although the £10M allowance limit cannot be circumvented by an individual selling certain business assets personally and others through a trust of which he or she is a qualifying beneficiary, Skinner has certainly facilitated the use of ER by trustees and tax planning in relation to the sale of a family businesses.

A business owner will be able to make the most out of each of his or her family member’s £10M allowance: in fact, provided all other conditions are met, transferring the business assets into a trust (with such transfer being free of any tax charges, including inheritance tax, due to the business nature of the assets transferred, and CGT, due to the so-called ‘holdover relief’) and giving family members working in the business an interest in possession in such a trust will enable such family members to claim ER on a later sale, each on an amount of gains of up to £10M.

Given recent commentary on this topic, it is time to take advice and to act!

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Category: Article