Court Rules on BADR for Beneficiaries with New Interests

BADR and Trusts: Court Clears the Path for Beneficiaries

When it comes to tax reliefs for trusts, the rules can be as clear as mud. But a recent landmark judgment has provided much-needed clarity for trustees and beneficiaries seeking to claim Business Asset Disposal Relief (BADR). The outcome? Trusts can qualify for BADR on business asset disposals even if the beneficiary only acquired their interest in possession shortly before the sale. This is a game-changer for tax planning and could influence how trustees structure their strategies in the future.

The Case in Brief

A settlor created several trusts for his children, with each child receiving shares in a trading company. The beneficiaries already owned personal shares and were involved in the business, meeting the personal company requirements for Business Asset Disposal Relief (BADR). However, they had only held their shares in the trust for a few months before the trust sold the shares.

The key question: Must a beneficiary hold their interest in possession for the full qualifying period to claim BADR, or just at the time of disposal?

The BADR Rulebook

BADR offers a reduced 10% capital gains tax rate when disposing of certain business assets. For trusts, the rules require three conditions to be met:

1. Disposal of settlement business assets: The trust must be selling qualifying business property.
2. A qualifying beneficiary: The beneficiary must have an interest in possession in the relevant assets.
3. The relevant condition: The beneficiary’s personal company connection and business involvement must meet the qualifying period requirements.

The law was clear on the qualifying period for business involvement—but silent on whether the interest in possession had to last just as long.

The Dispute

• Trustees’ view: The beneficiary needs an interest in possession at the time of the disposal period.
• Tax authority’s view: The interest in possession must span the entire qualifying period to show a substantial link between the beneficiary and the business.

The Court’s Ruling

The court sided with the trustees. Here’s why:

• Separate Tests – The law sets out three distinct requirements. The “qualifying beneficiary” definition stands alone and is assessed at the moment of disposal.
• No Hidden Conditions – If Parliament wanted a minimum ownership period for interests in possession, it would have written it into the legislation.
• Clear Drafting Wins – Modern tax law definitions are intended to be self-contained. Once a stage is satisfied, it isn’t revisited later in the process.

Why This Matters

This decision reopens planning opportunities:

• Faster Transactions – Trustees can now grant a beneficiary an interest in possession shortly before a sale and still claim BADR.
• Tax Efficiency – BADR’s 10% rate remains one of the most generous CGT reliefs available, and this ruling broadens its scope for trusts.
• Estate Planning Benefits – Trustees can adjust interests strategically without worrying about multi-year waits.

Practical Tips for Trustees and Advisers

1. Review Trust Assets – Identify qualifying business assets and beneficiaries who could trigger BADR.
2. Plan the Timing – You can align granting interests in possession with disposal dates without breaching BADR rules.
3. Maintain Records – Document the beneficiary’s role and personal company connection clearly.
4. Watch for Future Changes – This ruling clarifies the law as it stands, but legislative changes could tighten the rules.

The court has drawn a clear line in the sand: for BADR in trust disposals, a beneficiary needs their interest at the point of sale, not for the whole qualifying period. This restores flexibility to trust tax planning and offers significant opportunities for structuring disposals to achieve maximum tax efficiency.