UK and International Tax news

FTT Decision In Entrepreneurs’ Relief Case

Tuesday 17th September 2019

The FTT has recently heard an appeal against HMRC’s refusal to allow entrepreneur’s relief in relation to a capital gains tax liability arising on the voluntary liquidation of a company.

In Potter and Potter v HMRC [UKFTT/TC/2019/TC07348], the appellants were directors and equal shareholders of Gatebright Ltd, a company involved in the London Metal Exchange. Mr Potter was an introducing broker and a dealer with a physical seat in the ‘Ring’ at the LME.

Gatebright had been a successful business and had built up reserves of over £1m when the financial crash happened in 2008. In order to safeguard its reserves, the company used approximately £800k of reserves to purchase two six year investment bonds which matured in November 2015. The bonds paid interest of £35k a year. The remaining funds of approximately £200k were retained initially as working capital and then distributed as dividends between 2009 and 2015.

Following the 2008 financial crash, Gatebright’s trading activity in terms of volume of trades declined dramatically and the company issued its last invoice in March 2009.

During 2009, Mr Potter was taken seriously ill and was unable to work for some time. Whilst further trades were sought, no further business resulted and Gatebright was eventually put in voluntary liquidation during 2015/16.

The issue was whether the Potters could claim ER on the CGT liability triggered by the deemed disposal.  They submitted that Gatebright had continued to be a trading company until June 2014, less than three years before its liquidation, and they were therefore entitled to ER.

HMRC submitted that no invoices were issued after March 2009 and as a result of the crash, the company ceased to trade and so ceased to be a trading company outside the three year period in condition B in section 165I TCGA. Even if there were some trading activities, following the investment of the reserves in the bonds, the activities of the company became substantially investment activities. ER was not therefore due because the company was not a trading company as it could not be said that its activities did not include, to a substantial extent, activities other than trading activities.

The FTT accepted Mr Potter’s account of his activities after 2009 and found that the company had been carrying on trading activities with a view to reviving its trade and putting it in a position to take advantage of the gradual improvement in global financial conditions. The company’s purchase of investment bonds did not mean that it was carrying on investment activities as it did not and could not do anything else in relation to them for six years until they matured. The company’s activities were entirely directed at reviving its trade.

The FTT concluded that the Appellants were entitled to ER on the disposal of their respective shares in Gatebright on its liquidation and allowed the appeal.

Whilst this is only an FTT decision and therefore does not set a precedent, it may well impact on other definitions of trading status for tax purposes including EIS and other venture capital schemes and the substantial shareholdings exemption.

If you would like more information on this case, please contact Keith Rushen on 0207 486 2378.


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