Overview Of What Constitutes Trading To Qualify For Entrepreneur Relief?
What Is Entrepreneur Relief?
Trading to qualify for Entrepreneur relief (or Business Asset Disposal Relief as it is now called) is a useful HMRC tax relief that operates to reduce an individual’s Capital Gains Tax bill upon the sale of their business. It is however as with all reliefs subject to certain terms and conditions set out in the legislation.
For a quick summary check out our infographic on the key points from this post What Constitutes ‘Trading’ To Qualify For Entrepreneur Relief?.
Rejection Of Entrepreneur Relief Claim
This post is concerned about what constitutes trading for the purposes of the conditions giving rise to the available relief.
This post was provoked by the case of Assem Allam v Revenue and Customs  UKUT 291 (TCC). It had a number of appeal points but this post focuses only on the appeal against the rejection of the claim to Entrepreneur’s relief.
HMRC had succeeded on this point in the First Tier Tribunal in respect of its position that the company in question was not a trading company for the purposes of Entrepreneur’s relief.
What Is The Relevant Entrepreneur Relief Legislation?
The relevant Entrepreneur’s Relief legislation is introduced in Section 169H of the Taxation of Chargeable Gains Act 1992 which provides for a lower rate of capital gains tax for qualifying business disposals.
When the disposal arises from a disposition of shares by virtue of Section 169I of the Taxation of Chargeable Gains Act 1992, they must be shares owned by the individual (at least 5% of the ordinary shares) in the last 2 years and the company must be a trading company (or the holding company of a trading group).
What Is A Trading Company?
For this purpose, a Trading Company is defined in Section 165A(3) of the Taxation of Chargeable Gains Act 1992.
A company that is a trading company is engaged mainly in trading activities:
- for the purpose of a trade being conducted
- to acquire or start a trade
- to acquire a material interest in the share capital of another company
The relief does not extend to companies having substantial investment holdings.
Assem Allam v Revenue and Customs
Definition Of Trading Company
The First Tier Tribunal was held by the Upper Tribunal to have judged matters correctly where considerations of ‘trading’ were concerned. As for the definition it said:
The definition of a “trading company” refers to the “activities” of the company. This suggests that the focus should be on what the company actually does and a narrow reading of that term might suggest that we should have regard primarily to the active steps that a company takes in furtherance of its business. However, in our view, we should guard against placing too restrictive an interpretation on the term. As we have set out above, in our view, the limitation on the definition of a trading company is designed to ensure that relief is not given for transfers of shares in companies which are not engaged fundamentally in trading activity. That purpose would be defeated if the limitation did not encompass the holding of investments where the holding of investments is substantial in the context of the activities of the company as a whole. If that were not the case it would be possible for relief to be obtained on a sale of shares in a company which has a relatively small but active trading business (or which was perhaps preparing to trade) but which also holds a substantial investment portfolio generating significant income which requires little active management. In our view, that would run contrary to the purpose of the relief. “to a substantial extent”
ADL Not Substantially A Trading Company
The reasons that the FTT said ADL (being the relevant company) was not a trading company:
167. Having taken all of these factors into account, we have come to the view that ADL was carrying on activities which “to a substantial extent were not trading activities”.
168. The company’s main source of income over the relevant period is rental income from its properties. The company’s most significant income stream is derived from the Melton site, which is let to AML. That site is also by some margin the company’s most valuable asset.
169. In our view, although the company was clearly carrying on some trading activity or activity in preparation for trading, the proportion of the income of the company which comprises non trading rental income and the proportion of its asset base which are devoted to properties which are let simply for their rental income demonstrate that its property investment and rental activities have real importance and cannot be ignored. Those activities are not trading activities and they have to be regarded as “substantial” in the context of the activities of the company as a whole.
The Appeal To The Upper Tribunal – Trading To Qualify For Entrepreneur Relief
In looking at matters in the round the Upper Tribunal had this to say on the basic principle that was under discussion:
In our view, the question of what amounts to an activity in the context of a company is a straightforward question. It is what the company does in commercial terms. The question of how to measure the extent of an activity may be more difficult and will be informed by the statutory context. In the present case, the context is that of a relief from capital gains tax aimed at trading companies. Trading companies are defined in the first instance as companies carrying on trading activities, with an exclusion by refence to the extent of any non-trading activities. In that context it is clear to us that the FTT was right when it said at  that the purpose of the relief would be defeated if the limitation did not exclude shares in companies having substantial investment holdings. The holding of investments is an activity for these purposes. As we have said, we consider that the FTT was correct not to focus solely on physical activities. Otherwise, shares in a company with a small trading activity would qualify for relief even where it had a large investment business involving very little physical activity. Conversely, shares in the same company would not qualify for relief if it had a large investment business involving considerable physical activity. That result makes no sense to us in the context of a relief aimed at shares in companies carrying out trading activities. The measure of an activity for these purposes must be more than a simple measure of the time and work involved in carrying on the activity.
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