To trade or not to trade? Tax is the question

Why should I read this?

The recent First-tier Tribunal (FTT) decision in Eyre and others v HMRC [2025] UKFTT 566 (TC) concluded that a property company that was preparing to carry on a trade did not meet the conditions for Entrepreneurs’ Relief (ER) (now called Business Asset Disposal Relief (BADR)) on the basis that its activities during the relevant period included, to a substantial extent, non-trading activities. As a result, the company was not a “trading company” for the purposes of ER.

Individual shareholders should consider this case when deciding whether the company in which they own shares is a trading company for the purposes of section 165A(3) Taxation of Chargeable Gains Act 1992 and therefore whether BADR may be available to reduce the rate of capital gains tax (CGT) payable on the disposal of those shares.

What did the FTT decide?

In this case, HMRC argued that the conditions necessary for there to be “qualifying business disposals” were not met and that the disposals therefore could not benefit from ER and were instead subject to the normal rate of CGT.

HMRC’s position was that the company was not a “trading company” – i.e. a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities – throughout the relevant period and that, instead, it was an investment company (and always had been an investment company since incorporation).

The FTT ultimately agreed with HMRC on this point and, referencing the decision in Dr Assem Allam v HMRC [2021] UKUT 291 (TCC) (Allam), stated that “the rental income in this case was significant both in absolute terms and as a percentage of the company’s overall income and that needs to be taken into account in assessing the company’s activities holistically”. The FTT’s conclusion, when asking “what was this company actually doing?” was that “we do not see how it is possible to say that the non–trading activities of the company over the relevant period were not meaningful” (emphasis added).

The use of the word ”meaningful” here (and indeed more widely in the decision) is unhelpful, given that the correct test is whether the non-trading activities are “substantial” – there is no requirement in the legislation (or HMRC guidance) that the non-trading activities must not be “meaningful”.

Therefore, while this decision has not fundamentally changed the nature of the “substantial” test, it has served to muddy the (already decidedly murky) waters by using inappropriate terminology. (Notably, the test was already inconsistent with other tests that apply a “substantial” analysis, for example in relation to the substantial shareholding exemption.) 

What else do I need to know about Business Asset Disposal Relief?

When seeking to establish the availability of BADR, it is key to establish whether there are “substantial” non-trading activities – but doing so is less than straightforward.

HMRC’s guidance in its Capital Gains Manual (at CG64100) states that holders of shares or securities in a company who wish to establish whether the company is a trading company for the purposes of qualifying for BADR “should seek advice from the company” on the basis that  the company itself is most likely to be able to determine its trading status, which is ultimately a question of fact. However, reaching a clear conclusion may be easier said than done, not least because most companies will engage in some non-trading activities and, given the abandonment of the general application of the 20% rule post-Allam, there is no numerical threshold that works as a yardstick to determine when non-trading activities are substantial.

HMRC’s guidance (at CG64100) suggests that a company “can seek from HMRC an opinion under the terms of the Other Non-Statutory Clearance service” if there remains difficulty in determining whether a company qualifies for BADR, and this difficulty stems from uncertainty over HMRC’s interpretation of tax legislation. However, HMRC will not provide an opinion if there is uncertainty regarding a question of fact, which means this approach will not be suitable in all circumstances.

Unfortunately, the result is that the “substantial” test remains subject to some uncertainty.

For more information on Business Asset Disposal Relief

If you would like to discuss any aspect of this briefing, please do not hesitate to get in touch with any of the Eversheds Sutherland contacts below.