CG67860 - Reliefs: employee-ownership trusts: 'disqualifying events': clawback from vendor period
Throughout this manual, all legislative references are to Taxation of Chargeable Gains Act 1992 (“TCGA92”) unless otherwise stated.
S236O TCGA92 and Sch 37, Para 3(c) Finance Act 2014
Even where the relief requirements in section 236H(1) are met, see CG67801, a claim may not be made and relief previously given will be withdrawn if certain events occur in the four tax years following the year of disposal, or for disposals before 30 October 2024, the tax year following the disposal. Those are known as ‘disqualifying events’ and they occur when
- the settlement ceases to meet the ‘trustee residence requirement’.
- C ceases to meet the ‘trading requirement’.
- The settlement ceases to meet the ‘all-employee benefit requirement’.
- The settlement ceases to meet the ‘trustee independence requirement’.
- The settlement ceases to meet the ‘controlling interest requirement’.
- The ‘participator fraction’ exceeds two-fifths.
- The trustees act in a way which the trusts, as required by the ‘all-employee benefit requirement’, do not permit.
The ‘trustee residence requirement’ and ‘trustee independence requirement’ do not apply to transactions before 30 October 2024.
Example 27
Azmidiske Widgets Limited EOT was established on 12 March 2015. It acquired 51% of the ordinary share capital of Azmidiske Widgets Limited from Anthony on 16 March 2015. The relief requirements were met, where necessary until the end of the tax year, and so Anthony anticipated being able to make a claim that the disposal took place at no gain and no loss for capital gains tax purposes. On 4 May 2015 Azmidiske Widgets Limited went into partnership with another company, and the partners carried on business through the partnership from that date. Azmidiske Widgets Limited ceased to meet the ‘trading requirement’, see CG67830, from 4 May 2015, which was a ‘disqualifying event’. Anthony could therefore no longer make a claim for relief.
For settlements created before 10 December 2013, 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. In other words, if the settlement actually met the requirement at the time of the disposal and it subsequently ceased to actually meet the requirement, the fact that it could be treated as meeting the requirement is not enough to allow relief.
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.
See CG67822 for examples that illustrate the two paragraphs immediately above.
For the distinction between a settlement which actually meets the ‘all-employee benefit requirement’ and one which is treated as doing so, see CG67844.
Example 27A
The Taurus Widgets Limited EOT was established on 1 January 2025 by acquiring 75% of the ordinary share capital of Taurus Widgets Limited. The three trustees of the EOT are: Rosanna (the former owner of the company, an excluded participator), Maxim (an independent trustee), and Emily (an employee representative). Neither Maxim nor Emily are participators.
Maxim dies on 18 July 2026. The ‘trustee independence requirement’ ceases to be met, as excluded participators now constitute 50% of the trustees.
A new independent trustee is appointed on 10 September 2026. The ‘trustee independence requirement’ is met again from this date, as excluded participators now constitute fewer than 50% of the trustees. As the ‘trustee independence requirement’ was met again within six months of Maxim’s death, the ‘disqualifying event’ which would otherwise have occurred on 18 July 2026 is ignored.
If the settlement ceases to meet the trustee residence requirement or the trustee independence requirement for any reason other than death (for example, a resignation of a trustee or director), then a disqualifying event would occur.
Where a ‘disqualifying event’ occurs, no claim for relief may be made by P on or after the day on which it takes place.
Where P has already 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.
If capital gains tax becomes payable, S280 may allow the tax, that would otherwise be payable in full, to be paid by instalments provided the consideration, taken into account in the computation of the gain, is payable by instalments over a period exceeding 18 months and that continues beyond the date on which the tax would otherwise be due and payable. See CG14910.
The ‘participator fraction’ exceeding two-fifths, see CG67855, 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.
In relation to relief in respect of disposals on or after 6 April 2014 and before 26 June 2014 this paragraph does not apply. See CG67862 for the consequences of a ‘disqualifying event’ in relation to such disposals.