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HMRC internal manual

Capital Gains Manual

Reliefs: employee-ownership trusts: 'disqualifying events': transitional rules

TCGA92/S236P and FA14/Sch37, Para 3(d)

Where relief has, or could have, been claimed on a gain which accrues on a disposal on or after 6 April 2014 and before 26 June 2014, the transitional rules below will apply.

In these circumstances the trustees of a settlement are treated as making a disposal and immediate reacquisition of the ordinary share capital of C, at its market value at that time.

The transitional rules apply where a ‘disqualifying event’ occurs in relation to an acquisition to which TCGA92/S236H applies.  Such an event happens if and when

  • at any time after the tax year in which the acquisition took place
    • C ceases to meet the ‘trading requirement’, or
    • the settlement ceases to meet the ‘controlling interest requirement’, or
  • at any time after the acquisition
    • the settlement ceases to meet the ‘all-employee benefit requirement’, or
    • the ‘participator fraction’ exceeds two-fifths, or
    • the trustees act in a way which the trusts, as required by the ‘all-employee benefit requirement’, see CG67840 and CG67841, do not permit.

The rules apply on the occasion of the first ‘disqualifying event’ after the acquisition.

The disposal and reacquisition

  • is in relation only to shares of C to which this treatment has not applied before, and
  • is treated as taking place immediately after the ‘disqualifying event’.

Note that under the normal rules the disposal is deemed to take place immediately before the ‘disqualifying event’, see CG67861.

The limits on the situations in which the ‘all-employee benefit requirement’ is treated as met, see CG67861, apply for the purposes of the transitional rules.

Example 29

Chertan Widgets Limited EOT was established on 8 April 2014.  Chris transferred the entire ordinary share capital of Chertan Widgets Limited to the trustees on 7 May 2014.  The relief requirements were met and Chris made a claim to relief in his self-assessment tax return for the year ended 5 April 2015.  On 24 June 2015 Chertan Widgets Limited ceased to meet the ‘trading requirement’.  The ‘participator fraction’ had risen steadily during the previous year, going above 2/5 from 21 February 2015.  These were both ‘disqualifying events’, the former happening after the end of the tax year in which the acquisition took place and the latter occurring after the acquisition itself but in the same tax year as the acquisition.  The trustees are therefore treated as having disposed of and immediately reacquired the entire ordinary share capital of Chertan Widgets Limited, at its then market value, immediately after the ‘disqualifying event’ which occurred on 21 February 2015.