SolvedCG64021 | Business Asset Disposal Relief - “disposal of part of a business”: meaning - case law continued
From HM Revenue & Customs · Capital Gains Manual
Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.
Wase v Bourke (68TC109)
Mr Bourke ran a small dairy farm in partnership with his wife. Under the partnership agreement all capital profits and losses (except those on disposals of farm land) were allocated exclusively to him.
He decided to give up dairying and sold the dairy herd in March 1988. After the sale of the herd the farm was run predominantly as an arable farm. The land previously used for the herd was made the subject of an environmentally sensitive area management agreement, which placed restrictions on the use of the land.
After the sale of the herd the milk quota was leased to a third party until February 1989, at which time it was sold “in further implementation of his decision to give up dairy farming.”
The High Court held that retirement relief was not due. The relevant business activity consisted of the production and sale of milk. That activity ceased on the disposal by the taxpayer of the herd in March 1988. The subsequent disposal of the milk quota did not amount to a disposal of part of the business, nor was it part of the disposal of dairying which had taken place in March 1988.
In the Jarmin v Rawlings case, outlined at CG64020, it was right to consider the effect of simultaneous disposals together in deciding whether there was a disposal of his business. But Mr Bourke decided to dispose of his milk quota nearly a year after he had sold his herd and given up dairy farming. These two matters could not properly be described as amounting to a single transaction, even though they were steps taken in implementing the decision to get out of dairy farming. In line with dicta in the judgement in the Dancer and Johnston cases (see CG64020), there was here “separate disposals not part of the same transaction”.
Barrett v Powell (70TC432)
Mr Powell had, for many years, farmed 326 acres of land. He owned 100 acres, held 90 acres under licence and held an agricultural tenancy over the remaining 136 acres.
He was served with a notice to quit the 136 acres of tenanted land. Following negotiations with his landlord, he received £120,000 on executing a deed surrendering his tenancy. However, he was allowed to continue farming the land for a further 18 months under a temporary licence granted by his landlord. The level of his farming operations therefore remained unaffected until that 18 month period expired (when he then gave up both the 136 acres and the 90 acres held under the separate licence). Mr Powell continued to farm the remaining 100 acres of owned land for a further 12 months and, having disposed of stored harvest in the following 6 months, ceased business altogether.
The High Court held that retirement relief was not due on the gain on the surrender of Mr Powell’s tenancy. Although he had been forced to give this up, the disposal was merely of an asset used in his business and not of part of that business. It was not sufficient to say that the substitution of a temporary licence for the agricultural tenancy rendered the future of the business uncertain or more precarious. The important point was that there was no change in the character of the business or termination of any part of the business occasioned by the disposal of the tenancy.
On the facts, the business of farming continued very much as before and there could be no justification for linking the surrender of the tenancy with the eventual cessation of farming some three years later.
The case emphasises that, where an asset is disposed of prior to cessation of a business, relief will be due only if that disposal directly and immediately causes the whole or part of that business to cease.
Purves v Harrison (73TC390)
Mr Harrison traded as coach and minibus operator. He had been looking to sell the business and its assets as he wished to retire. He advertised the business for sale from 1989. In March 1990 Mr Harrison disposed of the business premises. Under the terms of sale, the purchaser granted Mr Harrison an informal licence allowing continued occupation of the premises for the purposes of his business and, on expiry of that licence, an option to acquire a three year assignable lease of the premises.
Mr Harrison was still attempting to sell the business. He slimmed down his fleet of vehicles in mid/late1990 in the hope that a reduced purchase price might attract buyers. The business was sold in December 1990
Mr Harrison appealed against a capital gains tax assessment for 1989/90 on the gain arising from the disposal of the premises. The General Commissioners held that the two sales were capable of together constituting a disposal of the whole of the business and there was a connection between the sales. Consequently retirement relief was due on the disposal of the premises.
The High Court considered whether a continuing intention to dispose of the premises along with the remainder of the assets of the business was on its own sufficient to create a connection between the two disposals to different persons separated in time by many months. The Court concluded that it was not and allowed the appeal.
This case again demonstrates that in certain circumstances relief may not be available where, although a business is entirely disposed of, this happens by way of more than one transaction.