Clarifying Entrepreneurs' Relief in Trust Disposals: Interests in Possession at Disposal Date – Quentin Skinner v HMRC [2022] EWCA Civ 1222

Introduction

The case of The Quentin Skinner 2015 Settlement L & Ors v Revenue And Customs ([2022] EWCA Civ 1222) addressed the interpretation of entrepreneurs' relief provisions within the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"). This appeal centered on whether the qualifying beneficiary of a trust business asset disposal needed to maintain an interest in possession for a minimum period of twelve months preceding the disposal to qualify for entrepreneurs' relief.

The parties involved included Quentin David Skinner as settlor, Barnabas Paul Clevely and himself as trustees, and Her Majesty's Revenue and Customs (HMRC) representing the tax authority. The primary issue was the correct construction of the provisions related to entrepreneurs' relief, particularly regarding the holding period of an interest in possession by life tenants in trust assets before their disposal.

Summary of the Judgment

The Court of Appeal examined whether HMRC was correct in refusing claims for entrepreneurs' relief on the grounds that the life tenants had not held an interest in possession in the disposed shares for the requisite twelve-month period. The First-tier Tribunal (FTT) had previously allowed the trustees' appeals, a decision later overturned by the Upper Tribunal (UT). However, the Court of Appeal reinstated the FTT's decision, favoring the trustees and challenging HMRC's interpretation.

The key determination was that the requirement for entrepreneurs' relief does not necessitate the qualifying beneficiary to maintain an interest in possession throughout the entire twelve-month period leading up to the disposal. Instead, it is sufficient for the interest in possession to exist at the time of disposal.

Analysis

Precedents Cited

The judgment referenced several key precedents to inform the court's interpretation:

Pearson v Inland Revenue Commissioners [1981] AC 753: This case addressed the meaning of "interest in possession" for capital transfer tax, establishing that an interest in possession entails a present right to income from the property.
R (on the application of Derry) v Revenue and Customs Commissioners [2019] UKSC 19: Lord Carnwath's exposition on statutory interpretation principles under the Tax Law Rewrite Project influenced the court's approach to drafting and interpreting modern tax statutes.
Eclipse Film Partners (No.35) LLP v Revenue and Customs Commissioners [2014] STC 1114: Emphasized the need for consistency and coherence in interpreting consolidating statutes.

These precedents underscored the importance of clear statutory construction, especially within the context of consolidated and rewritten tax legislation.

Legal Reasoning

The court's legal reasoning focused on the clear and logical structure of the TCGA 1992's entrepreneurs' relief provisions:

Section 169J: Defines the conditions under which a disposal of trust business assets qualifies for entrepreneurs' relief, emphasizing the relationship between the qualifying beneficiary and the company throughout a specified period.
Interpretation of "Qualifying Beneficiary": The court determined that the term refers to an individual who holds an interest in possession at the time of disposal, without necessitating the maintenance of that interest throughout the preceding twelve months.
Role of Section 169O: Although this section deals with apportionment of gains when multiple beneficiaries have interests in possession, the court found it did not impose additional holding period requirements on the qualifying beneficiary.

The judges emphasized that the statutory language did not support HMRC's interpretation requiring the maintenance of an interest in possession throughout the entire twelve-month period. Instead, the relief was applicable as long as the qualifying interest existed at the date of disposal.

Impact

The decision has significant implications for the application of entrepreneurs' relief in future trust asset disposals:

Clarification of Holding Period: Beneficiaries need only maintain the qualifying interest at the time of disposal, not necessarily throughout the entire twelve-month period.
Trust Structures: Trusts can structure asset disposals with more flexibility, potentially minimizing tax liabilities by timing disposals to meet the interest at disposal date.
HMRC Practice: HMRC may need to adjust its guidelines and interpretation strategies to align with this clarified statutory understanding.

Overall, this judgment provides greater certainty and potentially greater tax relief opportunities for beneficiaries of trusts, enhancing the practical application of entrepreneurs' relief.

Complex Concepts Simplified

Entrepreneurs' Relief

Entrepreneurs' relief allows individuals disposing of business assets to pay a reduced rate of Capital Gains Tax (CGT), currently set at 10%, instead of the standard higher rates. This relief aims to encourage business growth and entrepreneurship by easing the tax burden on business asset disposals.

Interest in Possession

An interest in possession is a legal term indicating that a beneficiary has the right to receive income from trust assets as they arise. This interest is not for a fixed term but is tied to the beneficiary's lifetime.

Qualifying Beneficiary

A qualifying beneficiary under TCGA 1992 is an individual who holds an interest in possession in the trust's business assets. To qualify for entrepreneurs' relief, this individual must meet specific conditions relating to their connection with the business, such as being an officer or employee of the company.

Personal Company

A personal company, within the meaning of TCGA 1992, refers to a company where the individual (beneficiary) holds at least 5% of the ordinary share capital and voting rights. This status is essential for qualifying business asset disposals under entrepreneurs' relief.

Section 169J and 169O

Section 169J: Outlines the conditions under which disposals of trust business assets qualify for entrepreneurs' relief, focusing on the relationship and connection between the beneficiary and the business.

Section 169O: Deals with the apportionment of gains when multiple beneficiaries have interests in possession in the disposed assets, ensuring that the reduced CGT rate is applied appropriately.

Conclusion

The Court of Appeal's decision in The Quentin Skinner 2015 Settlement L & Ors v Revenue And Customs provides critical clarity on the application of entrepreneurs' relief concerning trust business asset disposals. By affirming that the qualifying beneficiary's interest in possession need only exist at the time of disposal, the court simplifies the conditions required to claim this relief, enhancing its accessibility and reducing potential administrative burdens.

This judgment underscores the importance of precise statutory interpretation, especially within the framework of consolidated tax legislation. It ensures that beneficiaries can reliably plan disposals with tax efficiency in mind, fostering a more entrepreneur-friendly environment as intended by the legislative provisions.

In the broader legal context, the decision exemplifies the judiciary's role in elucidating legislative intent, thereby facilitating the effective application of tax laws and supporting economic objectives related to business growth and entrepreneurial activities.