Uncertainties in relation to the application of ESC D32

The Chartered Institute of Taxation (CIOT) have sent a proactive submission to HMRC on uncertainties in relation to the application of ESC D32.

The minutes of HMRC’s Capital Taxes Liaison Group meeting of 9 April have been published here (following a delay due to the General Election). Item 3 of the minutes provides an update on the application of ESC D32 following the CIOT’s submission, as below:

 3. Guidance on ESC D32 (CG65745)

Background was provided which related to landlords with mortgages or debts and in particular on those promoters of incorporation schemes.  Concerns were raised about how incorporation relief should be applied and whether business liabilities for the purposes of D32 may include property mortgages associated with letting activities.  There was also some confusion around the term “whole of the asset” and whether it related to the beneficial interest in the asset or the legal title as well.

HMRC asked for examples to see the concerns in practice.

It was felt that the section in the Capital Gains Manual dealing with ESC D32 would benefit from updating to reflect modern commercial practice by lenders and to provide some examples of how the relief may be applied. It was highlighted that D32 was introduced in 1988 and superseded the 1971 Statement of Practice, which was intended to simplify the transfer of a business to a company by not treating the taking on of liabilities as consideration.  A press release was issued in 1988 with the ESC and does provide more detail about how the concession was intended to be applied.  In light of the issue being raised it was felt that some of the language used in the press release could be used in the guidance to make the point clearer.

HMRC will engage with interested stakeholders to update the guidance.

The CIOT will be engaging with HMRC on the guidance update.