Entrepreneurs' relief and trusts

The FTT has held that the sale of the sole share in a trading company held in trust for the director as life tenant in possession did not qualify for entrepreneurs’ relief: Trustees of the Peter Buckley Settlement v HMRC [2024] UKFTT 29. The provisions of the legislation clearly required the beneficiary to hold shares in the company in a personal capacity in order for the sale by the trustees to qualify and that was not the case here.

The decision is a useful, albeit harsh, reminder that the exact conditions for qualifying for relief must be met in any individual case. The mere fact that the taxpayer concerned effectively wholly controlled the company and was entitled to all the income from the sole share was not sufficient.

Background

The case concerns the availability of entrepreneurs’ relief (now business disposal relief) on the sale of the one share in Peter Buckley Clitheroe Ltd. The company had been incorporated in 2009 with the one share issued to Mr Buckley. In 2012, Mr Buckley transferred the share to the Peter Buckley Settlement. The trustees of the settlement were Peter Buckley and one other person. Peter Buckley was the principal beneficiary of the settlement with income payable to him during his lifetime, with his daughter the ultimate beneficiary. As such, the trust was an interest in possession trust. Mr Buckley was also a director of the company and the company was a trading company.

In 2015, the one share in the company was sold by the trust for approximately £1.5m. The trust claimed entrepreneurs’ relief on the sale of the one share based on the provisions of TCGA 1992 section 169J. Section 169J provides that entrepreneurs’ relief is available on a sale by trustees where the shares are shares in a qualifying beneficiary’s personal trading company or assets in a qualifying beneficiary’s business.

Mr Buckley was a qualifying beneficiary as he had an interest in possession in the settled property. However, HMRC refused entrepreneurs’ relief solely on the basis that the share was not a share in his personal trading company. Section 169(3) defines a personal trading company as one where the individual holds at least 5% of the ordinary share capital and Mr Buckley did not own any shares in the company.

FTT decision

It was argued on behalf of the trust that Mr Buckley had both a legal interest in the share (by virtue of his position as trustee) and also beneficial ownership (as the holder of the interest in possession of the trust). The FTT rejected this argument. Mr Buckley only held the share as trustee in a fiduciary capacity and that required him to consider the interests of the ultimate beneficiary (his daughter) as well as himself. As a matter of trust law, he did not own the share personally. As such, Mr Buckley did not own at least 5% of the shares in the company and the company was not his personal trading company. The requirements of section 169J were not met.

The FTT also rejected the argument that this was a case where a reverse Ramsay approach could be applied such that a purposive construction of the legislation should be applied to allow the claim where it was the clear intention of Parliament that it should be covered. The FTT rather considered that the clear intention of Parliament was that to qualify for entrepreneurs’ relief in this situation, Mr Buckley would need to hold at least 5% of the share in his personal capacity.