In 2020, Entrepreneurs’ Relief was renamed Business Asset Disposal Relief (‘BADR’) – an inexplicable and confusing change since the relief is aimed at disposals of businesses and does not usually apply to disposals of business assets in isolation. But then again, the relief was never limited to ‘entrepreneurs’ either – so the new name is no more misleading than the old.
At the same time, the lifetime limit was cut by 90% to its current level of £1m, rendering it a much less important relief than thitherto. Nonetheless, it can still be worth £100,000 (or, at least in theory, in very unusual circumstances which we have never encountered, £180,000) in terms of hard cash, so is worth knowing about.
Although it is usually claimed (yes – it has to be claimed – it’s not automatic) by individuals, it’s also available to trustees. But the key to unlocking the relief for trustees is the existence of a ‘qualifying beneficiary’. In the context of a disposal of shares in a trading company, this means someone:
- Who, as a beneficiary of the trust, has an ‘interest in possession’ (typically, a life interest in income) in the shares being disposed of;
- Who is an employee or office-holder of the company; and
- In relation to whom the company is his or her ‘personal company’
This last point requires that the beneficiary possesses in his or her own right at least 5% of the ordinary share capital of the company giving at least 5% of the voting power. So if the beneficiary’s only interest in the company is the interest held under the trust, the trustees cannot claim BADR even if the trust owns 100% of the company.
The second and third bullet points – what the courts have called the ‘entrepreneurial connection’ – must be met by the beneficiary throughout a qualifying period (now at least two years, previously at least one year) that ends not earlier than three years before the date of disposal.
What has not previously been clear is whether it is also the case that the first bullet point – having an interest in possession in the shares – must also be met throughout that same qualifying period. That was the question posed by the trustees of the Quentin Skinner settlements.
The First-tier Tribunal thought not. The Upper Tribunal disagreed, holding that the same qualifying period applied to the interest in possession as to the ‘entrepreneurial connection’. The Court of Appeal have just decided (in [2022] EWCA Civ 1222) that the First-tier Tribunal was right: it was sufficient that the interest was held at the date of disposal. It’s unlikely that the case will go to the Supreme Court: so we (probably) now have a clear answer on the point.
The Court of Appeal did recognise that another part of the legislation ‘does appear to have been drafted’ on a basis difficult to reconcile with their decision. Possibly reassuringly to those of us who grapple daily with interpreting legislation, the Court of Appeal admitted defeat – ‘That is a puzzle to which I can offer no answer, but it is in my judgment important to keep it in perspective’.
Incidentally, although Skinner was all about a disposal of shares, these are not the only assets on which trustees can claim BADR. Relief can also be claimed where trustees dispose of assets (not, in this case, necessarily businesses as a whole) which have been used for the purposes of a business carried on by a qualifying beneficiary throughout a qualifying period meeting the conditions described above. The curious thing is that in that situation the relief is due only if the qualifying beneficiary ceases to carry on the business within the three years ending with the date of the disposal. This can have some very counterintuitive consequences (sometimes advantageous, sometimes not) where the qualifying beneficiary carries on the business as a member of a partnership.
For more information, please get in touch with your usual BKL contact or use our enquiry form.