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HMRC internal manual

Capital Gains Manual

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Reliefs: employee-ownership trusts: relief for deemed disposals under TCGA92/S71: 'disqualifying events': in the next tax year following that in which the deemed disposal took place

TCGA92/S236R and FA14/Sch 37, Para 3(f)         

In the same way as the occurrence of a ‘disqualifying event’ may result in the withdrawal or prevention of relief given under TCGA92/S236H, a ‘disqualifying event’ may also prompt withdrawal or prevention of relief given under TCGA92/S236Q, see CG67865.  The relationship between TCGA92/Ss236Q and 236R parallels that of TCGA92/Ss236H and 236O.

Where a deemed disposal of the kind described in CG67865 arises, and the relevant ‘relief requirements’ are met, but a ‘disqualifying event’ in relation to that deemed disposal takes place in the tax year next following that in which the deemed disposal occurs, the consequences are outlined below.

  •  No claim for relief may be made by the ‘transferring trustees’ on or after the day on which it takes place.

 

  •  Where the ‘transferring trustee’ has made a claim for relief and a ‘disqualifying event’ then occurs, the claim is revoked and the chargeable gains and allowable losses of any person, for any chargeable period, are to be calculated as if the claim had never been made.  Adjustments to be made in respect of any person in order to give effect to the change may be made at any time, regardless of the time limits that would otherwise apply.

If more than one ‘disqualifying event’ occurs, the date of the first to take place is the relevant date for the purposes of the paragraphs above.

The definition of ‘disqualifying event’ is similar to that in CG67860, but with the substitution of deemed disposal for disposal.  However, references to C should be read as meaning the company mentioned in the first bullet of CG67865, and those to ‘settlement’ should be read as references to the settlement whose trustees are the ‘acquiring trustees’.

When deciding whether there has been a ‘disqualifying event’ on the grounds that the trust has ceased to meet the ‘all-employee benefit requirement’, bear in mind that,

  • the settlement cannot be treated as meeting the ‘all-employee benefit requirement’ after the time of the disposal unless it was treated as meeting the requirement at that time,
  • if at the time of the disposal the settlement was treated as meeting the ‘all-employee benefit requirement’ and then later actually meets it, the settlement cannot again be treated as meeting the requirement, and
  • the ‘participator fraction’ exceeding two-fifths is to be disregarded if
    • the period that it does so lasts no more than 6 months and
    • the fraction exceeded two-fifths during that period by reason of events outside the reasonable control of the trustees.

The guidance above does not apply where the transitional rules take effect.

Example 31

On 15 October 2014 the trustees of the Enif Widgets Limited EOT became absolutely entitled as against the trustees of the Enif Widgets Limited EBT to 65% of the ordinary share capital of Enif Widgets Limited.  The four relevant relief requirements were met at the time and the trustees of the Enif Widgets Limited EBT intended to make a claim for relief.

Enif Widgets Limited ceases to trade on 24 December 2015 and so the ‘trading requirement’ is no longer met.  The trustees of the EOT are treated as having disposed of and immediately reacquired at market value, immediately before the disqualifying event, the company’s shares to which they became absolutely entitled on 15 October 2014.  The trustees of the EOT cannot make a claim for relief on or after 24 December 2015.  Any claim made before that date is revoked and chargeable gains and losses are to be calculated as if it had never been made.