One of the joys of tax is that someone else always knows just a little bit more than you do – and you are reminded of it constantly no matter how good you are at your job (at least that is my experience).
The latest example of this fact occurred recently in an entrepreneurs relief (ER) context and the understanding of the so called three year test. The specific issue is generally well understood, in that ER can be claimed up to 12 months after a company ceases to trade and providing the shares are then sold or disposed of within three years of the date of cessation. Typically this deals with scenarios where a company becomes dormant and is then wound up in the year or so after preserving ER for the shareholders.
However, as was pointed out to me recently, s.169I of TCGA 1992 does not actually say ‘cease to trade’, rather it says ‘cease to be a qualifying trading company’. What that potentially means is that if a company that is a trading company becomes tainted by investment activity, such that it loses it’s trading status (i.e. the 80 / 20 test), then provided there was twelve months of trading status prior to it being lost, the shareholders have three years from that date within which to sell or dispose of their shares and claim ER. If they hold the shares beyond the three years from the point trading status is lost, then ER is lost unless trading status is regained outright.
In many ways this is a real subtlety in the legislation in that it only becomes relevant in certain circumstances. Reading commentary which deals with only the most basic of scenarios can be misleading, however it is one of those examples that reminds you that looking at the actual legislation, even if you think you know what it says, is actually a very worthwhile thing to do!