CGT planning and the reorganisation rules

The FTT has held that arrangements to transfer shares within a family prior to a third party sale of a company, together with the use of loan notes as consideration for the sale, in order to benefit from entrepreneurs' relief did not mean that the whole exchange had a main tax avoidance purpose so as to be excluded from roll-over treatment under section 135: Wilkinson v HMRC [2023] FTT 695.

The FTT held that the relevant arrangements were the exchange of all of the shares in the company for shares and loan notes issued by the buyer and that the CGT saving could not be said to be a main purpose of those wider arrangements. In particular, it was not possible to view the exchange of the family shares in isolation from the whole deal.

Background

A number of individuals were owners of a company, P. Two of the owners, Mr and Mrs Wilkinson, owned 58% of the company. As part of their planning to sell the company, they intended to transfer part of their shareholdings to their three daughters so as to benefit from entrepreneurs' relief. This depended on the terms of the share sale including a requirement that the daughters' shares should be exchanged for £10 m loan notes qualifying for roll-over under TCGA 1992 section 135. In addition, these would need to be held for a year during which the daughters would need to be shareholders and directors in the acquiring company.

An agreement was reached in 2016 for the sale of P to TF1 Ltd in return for a mixture of loan notes and shares in TF1. The deal included the necessary features to effect the Wilkinsons' CGT planning and the effect of these arrangements was to reduce the rate of tax on £30m of proceeds from 20% to 10%, saving £3m in tax, when the loan notes were redeemed one year later.

HMRC rejected the claim for entrepreneurs relief on the basis that section 135 did not apply to the exchange. In particular, HMRC contended that section 135 was prevented from operating by section 137 on the basis that the exchange of shares formed part of a scheme or arrangements of which the main purpose, or one of the main purposes, was the avoidance of a liability to tax.

Decision of the FTT

The FTT found that the involvement of the daughters in the arrangements and the use of the loan notes was clearly tax motivated. In addition, it had from the outset been clear that the Wilkinsons wished to utilise these CGT planning arrangements as part of any arrangements to sell P. However, the FTT also found that if it had not been possible to structure the deal to include the necessary features (loan notes, shareholdings and directorships) then the Wilkinsons would not have walked away from the deal. The approximate £3m tax saving was small in the context of the overall receipt of around £73m in consideration by the family.

HMRC argued that the exchange (ie the exchange of shares in P for the loan notes and shares in TF1) formed part of a scheme or arrangements of which a main purpose was the avoidance of a liability to CGT. HMRC argued that it was not necessary for the arrangements to include the entirety of the exchange and in particular relied on the earlier case of Snell where the arrangements involved only part of the exchange. On that basis, HMRC argued that the gift of shares to the daughters together with the exchange of those shares for loan notes and shares, the daughters becoming directors and the redemption of the loan notes one year later amounted to a discrete set of arrangements and those arrangements had a tax avoidance purpose.

The FTT has rejected those arguments. In particular, the FTT held that the arrangements that had to be considered in this case was the exchange of all the shares in P to TF1 for some £130m.  It was not possible to restrict the consideration to simply the daughters' exchange of shares as the Upper Tribunal had held (in both Coll and Euromoney) that section 137 is an all or nothing provision and applies to the whole of the shareholdings exchanged when it applies.

Did the exchange for part of a tax motivated scheme or arrangements? It formed part of the wider deal which was a commercial arrangement for the sale of P, but could it be said that it also formed part of a another scheme or arrangement aimed at the CGT planning. The FTT held not. On a realistic view of the facts, the Wilkinsons' CGT planning was not a self-standing scheme separable from the deal as a whole. It was a plan to reduce the family's CGT liability in the event of a sale to a third party. It could not therefore be viewed as a scheme or arrangement distinct from the wider scheme or arrangements aimed at selling all the shares in P.

Even if it were wrong on that point, the FTT held that even if the Wilkinsons' CGT planning was a distinct scheme, the exchange did not form part of it. The exchange was a significantly larger endeavour that the planning aspects, not least because if involved shareholders that had not interest in that planning. And as the FTT had already held, it is not possible to identify a scheme or arrangement by reference only to a part of the exchange.

Having found that the scheme or arrangement of which the exchange formed part was the whole deal, the FTT held that the avoidance of CGT was not a main purpose of that deal. Enabling the Wilkinsons' tax planning was "a purpose" (because the deal was structured to accommodate it) but not a main purpose. The main purpose of the deal was the sale of P for £130m, a large minority of the shareholders had no interest in the CGT planning and even for the Wilkinsons the tax saving was small. It was also clear that the Wilkinsons would not have scuppered the deal if the CGT planning had not been put in place.

Comment

The decision highlights the importance of identifying the scheme or arrangement for the application of the purpose test. In the context of section 135 and section 137, where the "exchange" was necessarily the exchange of all the shares involved (and cannot be restricted to a subsection of the shares), the scheme or arrangement was necessarily the whole of the deal. In that context, a comparatively small tax saving by reference to non-essential tax planning arrangements built into the wider arrangements could not be said to amount to a main purpose of the whole deal.