CGT avoidance was not main purpose of arrangements

A family of taxpayers have won an appeal on capital gains tax (CGT), as the First-tier Tribunal (FTT) found that although CGT was considered in the sale of a company, structured partly as a share-for-share exchange, the main purpose of the arrangements as a whole was not tax avoidance.

Just before the sale of a family business, a married couple transferred some of their shares to their three daughters. The sale was structured as an exchange of their shares for shares and loan notes in another company. The rights attached to the new shares, alongside the non-executive directorships taken on by the daughters, meant that the daughters qualified for what was then called entrepreneurs’ relief (ER) on subsequent redemption of the loan notes.

In order for the CGT relief for a share-for-share exchange to apply, the main purpose of arrangements must not be the avoidance of tax. HMRC denied the claims for CGT relief on those grounds, arguing that the exchange was part of arrangements mainly to avoid CGT.

The FTT allowed the taxpayers’ appeals. It considered that the CGT planning involving the initial transfer to the daughters was not a scheme or arrangement in its own right, but that the scheme or arrangements of which the exchange formed part was the deal itself. It went on to find that the CGT planning was not the main purpose of the deal. The deal would have happened with or without the CGT planning. The family made £73m under the deal, and the tax savings were £3m. The main purpose of the deal was to realise the value in the family business, with the tax planning, including entitlement to ER, being a side benefit.

Wilkinson & Ors v HMRC [2023] UKFTT 695 (TC)

From Tax Update September 2023, published by Evelyn Partners LLP

Adjusting gains calculations for payments under warranties and indemnities

Most contracts for sale include certain protections for the buyer in the form of warranties or indemnities. In many cases the time period for bringing a claim to the seller is six years.

Sellers who make such a payment under a warranty or indemnity may need to adjust their capital gains calculation. This falls under the provisions for contingent liabilities in s49, Taxation of Chargeable Gains Act 1992. This sets out that a claim may be brought when a liability “subsequently becomes enforceable and is being or has been enforced”. The normal four-year time limits for claims apply, per s43, Taxes Management Act 1970.

HMRC has confirmed that, in its view, the four-year time limit runs from the point at which the contingent liability becomes enforceable and is being enforced, per CG14805 and CG14933 of HMRC’s Capital Gains Manual. The clock therefore starts ticking when a buyer makes a claim under warranty or indemnity, not from the date of the original disposal. This is a welcome clarification, as some third-party commentary had suggested that the time limit for claims ran from the date of disposal, potentially leaving a two-year period open to claims without any associated relief available.

Contributed by Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW

Tax considerations for farm development projects

Farm development projects of small brownfield sites such as old farmyards and small fields close to the village are plentiful throughout the UK. These present regular practical tax challenges for tax advisers. 

There is the fundamental consideration of ascertaining whether a ‘profit’ is taxed as a capital gains tax (CGT) disposal as opposed to income tax. For this, forensic analysis of the transaction before agreements are signed is essential. The surrounding facts must be thoroughly understood to ensure the tax treatment follows as expected. The promotion agreement, if appropriate, must be scrutinised for hidden terms that could have knock-on practical tax implications. Where disposals fall within the CGT regime, there is often a choice of tax reliefs that may apply (eg, rollover relief or business asset disposal relief). 

To achieve a grant of planning permission, landowners may agree positives for the local area with the local council, generally in an agreement under s106, Town and Country Planning Act 1990. Such agreements could involve conditions, such as to give up an area of farmland for tree planting, or the provision of farmland for the village green as part of the Commons Act 2006. The tax impact of these conditions should be considered as part of the CGT computation and other tax planning. For example, tree planting costs may qualify as a cost of development. 

Inheritance tax implications of a transaction must also be contemplated. For instance, land being taken out of agricultural or business use may have an impact on a future agricultural property relief (APR) or business property relief (BPR) claim. Likewise, land surrendered for council use (or similar) may no longer form part of a trade, so may be caught as an excepted asset for BPR purposes.

Contributed by Julie Butler FCA, founding director of Butler & Co Alresford Limited

CGT reporting for deferred property gains

Enterprise investment scheme (EIS) deferral relief (or re-investment relief) allows a taxpayer to defer one or more chargeable gains by reinvesting the gain into qualifying EIS shares. The deferred gain comes back into charge either when the EIS shares are sold, or on an event where EIS income tax relief is withdrawn.

It is possible to defer property gains using EIS deferral relief. Typically, a direct disposal of UK residential property resulting in a gain requires a capital gains tax on property disposal (CGT PPD) return to be filed and the CGT paid to HMRC within 60 days of completion.

HMRC has confirmed through the agent forum that a deferred property gain coming back into charge does not trigger a requirement to submit a CGT PPD return. This is because it is not treated as a direct disposal of UK residential property so is not within the additional reporting requirements. Instead, HMRC advises that the property gain should be included on the taxpayer’s self assessment tax return for the year in which it came back into charge. The CGT liability should be paid by the normal 31 January deadline.

Contributed by Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW

Partial win for taxpayer on child benefit

The First-tier Tribunal (FTT) found that a taxpayer was liable to pay the high income child benefit charge (HICBC), but as he had a reasonable excuse the penalties were cancelled and the older assessments were out of time.

The taxpayer’s partner had claimed child benefit for their child and her child from a previous relationship. The taxpayer did not know that she claimed this, and had done so since before they met. On receiving a nudge letter from HMRC about potentially needing to pay HICBC, the taxpayer gave this letter to his partner, who rang HMRC and cancelled her claim when she was told she was not entitled. She thought that the matter was then resolved, being unaware of the HICBC.

When HMRC next contacted the taxpayer he understood the position, but claimed that he had a reasonable excuse as he was not aware that child benefit was being claimed. The FTT accepted this. The older assessments were also cancelled, as he had not been careless so a lesser time limit applied, but the most recent two assessments were upheld. The taxpayer had appealed those, as one of the children claimed for was not his, which the FTT found was irrelevant, and that HMRC should have been aware all along that child benefit should not be paid, as it knew his salary, which the FTT also dismissed.

Lee v HMRC [2023] UKFTT 651 (TC)

From Tax Update August 2023, published by Evelyn Partners LLP

High income child benefit charge appeal stayed

The First-tier Tribunal (FTT) has stayed a high income child benefit charge (HICBC) appeal pending determination of the test case on this matter. The taxpayer’s appeal against penalties was allowed, as his reasoning for not looking into the subject was valid. He was childless, but cohabiting with a partner who had children while keeping separate finances.

The taxpayer had been issued with HICBC assessments covering four tax years, as in that period he was cohabiting with a partner who had two children of her own. They maintained separate finances. When they commenced cohabiting he was unaware that she claimed child benefit, and he also earned under £50,000 a year. His earnings subsequently increased.

The FTT agreed that the taxpayer was unaware of the HICBC despite HMRC publicity campaigns, as he was unaware that child benefit was a relevant topic for him at the time. It also found that he had not received a letter HMRC claimed to have sent in 2013, with the probability being that it was never sent as the taxpayer earned under the threshold in 2013 and had only just started cohabiting. When he received a nudge letter in 2021, he asked his then wife and discovered that she was receiving child benefit, which she then stopped claiming.

The FTT:

• Found that the taxpayer had indicated that he planned to appeal by the required date such that HMRC was unable to apply retrospective legislation, and two of the appeals were stayed behind final litigation in the Wilkes case.
• Accepted the taxpayer’s appeals against penalties, as he had a reasonable excuse for being unaware that HICBC was due in the circumstances above.
• Found that HMRC was out of time to assess two of the tax years, because as he was not careless the extended time limit did not appeal.

Ashe v HMRC [2023] UKFTT 538 (TC)

HMRC v Wilkes [2022] EWCA Civ 1612

From Tax Update July 2023, published by Evelyn Partners LLP

Child benefit win for taxpayer with severance payment

The First-tier Tribunal (FTT) has found that a taxpayer was not liable to the high income child benefit charge (HICBC) as a severance payment relating to disability should not be counted as part of her ‘adjusted net income’ (ANI). She was therefore fully eligible for the benefit.

The taxpayer earned less than £50,000 in the tax year in question, but on losing her job she was given a severance payment that took her total income over this threshold. The documentation expressed the payment as for loss of employment, but she had left following an occupational health report and it was clear that the underlying reason related to her disability.

HMRC argued that as the severance payment was made on account of other matters as well as disability, none of the disability payment qualified for the disability exemption. The FTT disagreed. It found that the purpose of the disability exemption is to exempt from tax any payment which is made on account of a disability, irrespective of whether other payments are being made to the employee as part of the same deal.

Her former employer had supplied a breakdown in a letter, so the amount specified as for disability was exempted, bringing her ANI below the threshold for the HICBC.

Howard-Ravenspine v HMRC [2023] UKFTT 471 (TC)

From Tax Update June 2023, published by Evelyn Partners LLP

Debts released when settlement agreement signed

The First-tier Tribunal (FTT) has found that debts were released at the time a settlement agreement was entered into, so the close company shareholders were taxable on the written-off portion of loans in that tax year.

After financial difficulties, a close company, of which both the taxpayers were directors, went into liquidation. They owed the company just over £1m. As part of the liquidation, they entered into a settlement agreement whereby they paid £100,000 in instalments and the rest of the debt was released. A clause stated that if the payments were not made as agreed, then the whole of the debt would become payable. The issue at the FTT was whether or not the debt was released in the tax year of the settlement agreement. The taxpayers argued that the debt was not released until they had finished making the payments required under the agreement.

On analysis of the legislation and contracts, the FTT agreed with HMRC that the debt was released when the agreement was signed. The agreement was labelled as in full and final settlement, and referred to a release, so the main transaction of the release was made then. The close company directors were taxable on the forgiven loans in 2013/14.

England & Anor v HMRC [2023] UKFTT 313 (TC)

From the weekly Tax Update dated 19 April 2023, published by Evelyn Partners LLP

Share transactions found not to be a trade

A taxpayer who made losses on his personal investments has been denied loss relief against his income, as his activity did not meet the criteria to be a trade and was not carried on commercially.

The taxpayer bought and sold shares starting in 2006. Some transactions were carried out by him personally and some by his financial advisers without his input. All were treated as capital until he retired in 2016, having inherited a large sum. His case was that thereafter he was able to focus on making a living from buying and selling shares.

Most of his investments were held in a professionally managed portfolio, which he did not claim formed part of the trade. He made a loss in the first two years under appeal and a small profit in the third. He restricted his sideways loss relief claims for the cap for work in a non-active capacity as he could not demonstrate that he spent more than 10 hours a week on it. He explained that he conducted research and made trades for one to two hours a day.

HMRC assessed these to be capital losses and profits, and the First-tier Tribunal agreed. On average, he only made one transaction a week, and had not increased this greatly from his busiest year before retirement. He spent very little time on the activity, fitting it around the rest of his commitments. He did not have a clear plan for the activity, nor did he conduct it in an organised way similar to a business. Overall, this was not a trading nor a commercial activity, but simply the management of a portfolio of personal investments, with an aim of growth rather than income.

Henderson v HMRC [2023] UKFTT 281 (TC)

From the weekly Tax Update dated 22 March 2023, published by Evelyn Partners LLP

Redress payment found to be income

Redress payments for a mis-sold financial product were found to be refunds chargeable to income tax, rather than non-taxable damages or payment to stop litigation.

The taxpayers took out a loan to purchase a property. Between exchange and completion they agreed to the bank’s suggestion to purchase an interest rate hedging product. This was later found to be mis-sold as part of a wider independent review, and the taxpayers received a redress payment and interest. They paid tax on the interest element but argued that the redress payment was not taxable income.

The settlement offer they had accepted was for an amount more than a straight refund, but led to them stopping their proceedings against the bank for claims for damages for mistreatment and consequential losses. Had the settlement been drafted differently the tax treatment may have been clearer. The taxpayers argued that terms of the general review had prevented them from taking advice, though the First-tier Tribunal (FTT) found that they could have taken advice on the tax treatment.

The FTT found that the fact the taxpayers had started litigation did not change the nature of the redress payment. They had chosen to enter into the redress arrangement, to put their civil claim on hold, and to accept the second of the offers made. The payment was, as stated in the offer letter, a refund of the amounts paid by the taxpayers for the mis-sold products, so the FTT upheld the closure notices finding that these were chargeable to income tax. Penalties for carelessness were upheld as the taxpayers were experienced businessmen, but had not told their tax advisers about the redress payments, just the interest. 

Barnett & Anor v HMRC [2023] UKFTT 62 (TC)

From the weekly Tax Update dated 2 February 2023, published by Evelyn Partners LLP

Interim dividend taxable on receipt

Two taxpayers were in receipt of a dividend in separate tax years. HMRC sought unsuccessfully to argue that both payments were taxable at the earlier of the two receipt dates.

Two brothers wished to extract a dividend from a company, but in different tax years. One brother was non-UK resident in the year following receipt of the dividend by the other and therefore wished to delay receipt until after 5 April. On advice, the directors were authorised to pay an interim dividend in accordance with these wishes. HMRC sought to tax the latter dividend at the earlier date and the taxpayer appealed.

A final dividend is usually taxable once declared by the company in a general meeting because such a declaration creates an enforceable right for the shareholder. By contrast, there is generally no enforceable right to an interim dividend before payment and thus it is only taxable on actual payment.

HMRC accepted that this was the general rule, but in this case – among other technical arguments – proposed that the shareholder who had not been paid on the occasion of the first distribution would have an enforceable claim for unfair prejudice against the company and thus the right to receive the dividend, making it taxable in the earlier year. The First-tier Tribunal did not accept this. The court remedy was discretionary and it was by no means certain, in the circumstances, that it would have ordered payment, if it was available at all.

Since the taxpayer had no enforceable debt until payment, this later distribution to him was taxable on receipt and his appeal succeeded.

Gould v HMRC [2022] UKFTT 431(TC)

From the weekly Tax Update dated 7 December 2022, published by Evelyn Partners LLP

Declared, but unpaid dividends not held to be taxable

The First-tier Tribunal (FTT) has found that dividends that had been declared, but due to an undertaking could not be extracted from the company, were not taxable. There was no right to receive the dividends as income in the tax year of declaration, or ultimately at all.

The taxpayers held the single issued share of a property management company jointly; one was also the director and the other the company secretary. When the business was at risk and needed external investment, the director decided that strong dividend declarations would attract this. The bank that had made substantial loans to the company was unwilling to see substantial profit extraction, so was given an undertaking such that the dividends would effectively not be paid.

The FTT looked at the documentation and history of the dividends. The minutes that stated the amount of the dividend voted for also stated how much should be paid, and how much credited to a directors account and not made available to the taxpayer. Although the dividends had been declared, due to the unusual facts the FTT found for the taxpayer that the withheld dividends were not taxable. The undertaking and the minutes meant that there was no enforceable debt for the withheld dividends. The taxpayers did not have the right to receive the withheld dividends, so were not taxable on them.

Jays v HMRC [2022] UKFTT 420 (TC)

From the weekly Tax Update dated 30 November 2022, published by Evelyn Partners LLP

Relief from inheritance tax for loss on sale of land 

Inheritance tax (IHT) is due on the market value at the date of death of land or property included in the deceased’s estate, subject to availability of reliefs against IHT. Where such land or property is sold for less than the value at death, sale-of-land relief may be claimed to substitute the sale price for the value at death. This may result in a lower IHT liability and thus an IHT refund. 

There are several conditions for the relief to be available. These include that the disposal must occur within four years of the date of death, and that the difference between the value at death and the sale price must be more than £1,000 or 5% of the value at death (whichever is lower). Sales to a person who is beneficially entitled to the land or property are generally excluded from relief – though this area is complex and should be considered on a case-by-case basis.

There are other considerations that may make sale-of-land relief less advantageous. 

First, if a claim for relief is made, the sales price replaces the value at death for all land and property disposed of within three years after the date of death, and for losses only in the fourth year after death. In other words, losses arising in the four years after death are netted off against gains arising in the three years after death. The relief is therefore only of benefit where losses outweigh gains. 

The sales price for the purposes of this relief is the gross sales price, with no account taken of incidental expenses (differing from the treatment for capital gains tax (CGT) purposes). Similarly, no discount to sales price is available in cases of jointly owned property, so the value at death may be lower. Substituting the sales price for the value at death may also have an impact on the acquisition cost for CGT purposes. 

A claim for sale-of-land relief must be made to HMRC within four years of the end of the three-year period following the date of death. A claim cannot be withdrawn once it has been made, although a claim may be denied by HMRC if it is disadvantageous to the taxpayer. 

HMRC’s manuals cover the relief at IHTM33000.

Contributed by Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW

‘Home loan’ scheme ineffective for IHT

The First-tier Tribunal (FTT) found that no deduction from the value of an estate could be given for a promissory note given by the deceased. The scheme under which she had remained in her home although it had technically been transferred to a trust was invalid for inheritance tax (IHT).

The taxpayer sold her home to the trustees of a trust called the life settlement. She had an interest in possession (IIP) in this trust. In exchange, she received a promissory note. She then assigned the note to another trust, the family settlement. She was excluded from benefiting under this trust, in which her three children had IIPs. She remained living in the property rent-free until her death.

The intention of the scheme was that the assignment of the note was a potentially exempt transfer, and she did in fact survive more than seven years after that transfer. The estate was calculated with the property being deemed to form part of her estate under her IIP in the life settlement, but with a deduction for the value of the note, which was worth the same as the property had been at the time of transfer.

HMRC’s position was that there should be no deduction from the value of the deceased’s interest in the property for the value of the note, or alternatively that the note should be part of her estate for IHT.

There were various problems with the implementation of the scheme, including undated documents, documents signed on different days to those planned, and the executors becoming the registered owners of the property after death rather than the trustees. HMRC argued that these indicated that the arrangements were a sham. The FTT disagreed, finding that the anomalies were due to errors and forgetfulness rather than an intention to disregard the scheme. The scheme documents had the intended effect in law.

The case report is very detailed and covers a raft of technical arguments. The two key points coming out of the case are that:

• the liability, under the note, which was deductible in her estate, was reduced to nil;
• the executors did, however, avoid double taxation, as the FTT agreed with them that the value that was repayable under the note was not an asset in the estate.

The Executors of Elborne & Ors v HMRC [2023] UKFTT 626 (TC)

From Tax Update August 2023, published by Evelyn Partners LLP

Environmental land management schemes

It is very good news that, following the Spring Budget 2023, the agricultural property relief (APR) definition is proposed to be extended to include land being controlled under environmental land management schemes (ELMS). However, at present it is just a proposal and there is a practical worry as to what happens in the meantime to such land currently being administered on the death of a farmer while we await the results of the consultation. Such concerns would especially apply to rewilding and other ‘eco- warrior’ projects not falling into ELMS and the income-generating established grant schemes.

There would be two potential routes for relief for someone who had died owning such land in the ‘gap’: 

• argue APR regardless, based on evidence, case law and the pressure being placed on farmers by environmentalists in anticipation of the results of the consultation; 
• argue business property relief (BPR) if appropriate as part of the whole business.

Some of the environmental grants are substantial and the income would help BPR claims on commerciality. Those deceased farmers without such subsidies might have a ‘hill to climb’ to APR and BPR. For inheritance tax relief it is therefore advised that in this interim period farmers are encouraged to join the pilot/formal ELMS, etc, where available, and evidence is kept to support APR / BPR claims.

The government has not provided a timescale for commenting on the consultation and there has been no announcement on the precise terms of any extension to APR.

Contributed by Julie Butler FCA, Founding Director, Butler & Co and Philp Whitcomb, Partner, Clarke Willmott

Effective debt waiver

It happens not infrequently. A parent helps out an adult son or daughter by lending money to meet a particular demand: perhaps a deposit for a house, school fees, home improvements or whatever.

Time passes; you decide that you are never going to need the money to be repaid and that it makes more sense in terms of inheritance tax (IHT) planning for it to be treated as a gift. So, mindful of dotting the Is and crossing the Ts, you write a formal letter confirming that repayment of the debt is being waived. Obviously, it’s a potentially exempt transfer (PET) at that point, but provided you survive seven years, there’s no problem.

Obvious; but wrong.

The problem is that there is a general rule to the effect that an agreement made without consideration isn’t enforceable. If you owe me £100 and I say, “Forget repayment – keep the money,” that doesn’t ordinarily prevent me from enforcing the debt in law or equity. Similarly, if a parent simply writes to confirm that repayment will not be pursued, it doesn’t extinguish the debt: it remains an asset of the parent’s estate for IHT purposes.

Nor does it work to accept a nominal amount in repayment of the debt. That was established in ‘Pinnel’s Case’ in 1602: the payment by a debtor of a smaller sum in satisfaction of a larger one is not a good and valid discharge of the debt. Not, at any rate, unless it’s repaid early; if I am due to pay you £1m on Friday and you agree to accept £1 in full settlement provided I cough up by Thursday, that – bizarrely – is OK.

So how do you solve the problem?

The conventional method is to document the waiver in a deed. Following the abolition 30-odd years ago of most formalities, this means little more than a signed agreement that makes it clear that it is intended to be a deed; so it is not particularly onerous to prepare. But if you don’t want to do it yourself, you’ll need to instruct a solicitor or other ‘authorised person’ (which sadly doesn’t include mere accountants) to prepare one, as the preparation of a deed is a ‘reserved activity’ under the Legal Services Act 2007.

Failing that, there’s an intriguing alternative. You could agree to accept something – literally anything other than money – from your debtor in settlement of the debt. The value of what you accept is irrelevant. As one 19th-century judge put it:

“According to English Common Law, a creditor may accept anything in satisfaction of his debt except a less amount of money. He might take a horse, or a canary, or a tomtit if he chose, and that was accord and satisfaction; but, by a most extraordinary peculiarity of the English Common Law, he could not take 19s 6d in the pound.”

Of course, to the extent that what you accept is less than the value of the debt, that is a PET. And no doubt the RSPB would have something to say about settling debts with tomtits; but that’s another problem for another day.

Contributed by David Whiscombe writing for BrassTax, published by BKL

No IHT reduction given for debt

A debt created using loan notes to reduce the value of a trust to zero was not deductible in calculating inheritance tax (IHT) on the beneficiary’s death.

The deceased had been the principal beneficiary of a family trust. This held a property, had indemnified loan notes such that it was essentially the debtor, and held two investment bonds. The executors argued that the value of the loan notes should be deducted from the deceased’s estate for IHT.

The First-tier Tribunal found that under the arrangements, although the loan notes were a liability, and loan notes were permitted to be used by the recipient, their value was essentially nil, so no deduction could be given.

Pride v HMRC [2023] UKFTT 316 (TC)

From the weekly Tax Update dated 19 April 2023, published by Evelyn Partners LLP

Interest in possession did not exist

The First-tier Tribunal (FTT) has found that an interest in possession (IIP) did not exist, in a case where a right left to an individual to reside in a house after death was only made practically possible by the residuary beneficiaries lending money to the estate to pay the initial inheritance tax (IHT) bill. As, had this not happened, the right to occupy the house could not have been given, no IIP arose, and no IHT was therefore due on its termination.

The estate consisted of little apart from a house. The IHT liability, £15,600, could not be settled as there was insufficient cash in the estate. The Will granted a right to a friend (B), who had cared for the deceased, to live in the house for his lifetime, after which it was left between five nieces and nephews (the residuary beneficiaries). Due to this dilemma, the residuary beneficiaries paid the IHT from their own funds.

After B’s death, the house was sold. IHT was then paid on the basis that B had held an IIP in the house at the time of his death. Subsequently, a refund was requested on the grounds that no IIP existed.

The FTT examined the provisions of the Will. Had there been enough cash in the estate to pay the IHT on death, it was common ground that an IIP would have arisen. The appellants argued that B did not have an IIP immediately on the first death, just a right to compel due administration of the estate. As the Will Trust was not capable of being achieved due to lack of funds, this never matured into an IIP. Had the house been sold, B would not have had an IIP after the sale. The residuary beneficiaries’ choice to pay the IHT and avert a sale should not in itself give rise to an IIP. HMRC argued that B’s rights did mature into an IIP and that the house could have been mortgaged to pay the £15,600 IHT bill.

The FTT made its decision by looking at what the executors would have been compelled to do had all parties not agreed to the practical route taken. The residuary beneficiaries could have compelled administration of the estate and HMRC compelled payment of the IHT. The only route to compel payment was the sale of the house, in which case there would have been no IIP. As there was a creditor when the estate was reduced to just the property, B could not enforce a right to live in the property under the Will. Therefore he did not have an IIP and the appellants’ appeal was allowed.

Hall & Lopez as trustees of the Carolina Raboni estate v HMRC [2023] UKFTT 32 (TC)

From the weekly Tax Update dated 25 January 2023, published by Evelyn Partners LLP

Mixed-use SDLT dismissed on house with field

The First-tier Tribunal (FTT) has found that a property with a field under an informal grazing agreement with a third party was not mixed use. The arrangement was not on a commercial basis until after the purchase, as the contract to formalise and modify it was not signed until a month later.

After buying a house with a field, the taxpayer amended her stamp duty land tax (SDLT) return from declaring it as a residential property to a mixed-use property, on which SDLT is charged at lower rates. The house and some of the surroundings, including stables, paddock and garden, were accepted by the taxpayer to be residential, but she argued that an eight-acre field was not part of the grounds, the total plot being 10 acres. The field is adjacent to the rest of the property, accessed from the garden by a gate. The FTT determined on the balance of probabilities that the previous owners had not used this as a paddock for horses, despite indications the other way in the estate agent listing.

The previous owners allowed a third party to mow the grass once a year and sell the hay, with no money changing hands. The FTT accepted that the taxpayer had continued the arrangement, but held that the previous arrangement was not commercial, so it was still not commercial at the sale date, the key point for SDLT. The fact that a month later a contract was signed requiring the third party to make a monthly payment, which could have made this commercial, did not change the position at purchase. The taxpayer’s appeal was dismissed.

Modha v HMRC [2023] UKFTT 783 (TC)

From Tax Update October 2023, published by Evelyn Partners LLP

Rented garage did not mean property non-residential

The First-tier Tribunal (FTT) has found that residential rates of stamp duty land tax applied although the taxpayer let out a garage from the time he bought a property. It was not let commercially.

The taxpayer arranged to let out a garage from the day he purchased the property that included it. It was a separate building from the main home, on a strip of land adjoining the gardens of the substantial property. The garage land had a separate title, but the titles had been in common ownership for many years and were bought together. This was a second property, so subject to the higher residential rates. He made a claim for mixed-use treatment.

The FTT rejected his appeal against HMRC’s refusal of the claim, finding that this was not a commercial lease. The tenant was a company with which the taxpayer was associated, no real effort had been made to set the rent at a commercial rate, the taxpayer used the garage to store his own possessions, and paid for the electricity supplied to it in the common supply. It was simply part of the garden and grounds.

Kozlowski v HMRC [2023] UKFTT 711 (TC)

From Tax Update September 2023, published by Evelyn Partners LLP

HMRC’s ATED technical guidance

HMRC has updated its annual tax on enveloped dwellings (ATED) technical guidance. The guidance has been updated to provide additional information on the ‘view to a profit’ test. The test applies to various ATED reliefs, including for: 

• property rental businesses; 
• property traders; 
• property developers; 
• farmhouses; and 
• dwellings open to the public.

Sewage treatment plant part of garden and grounds

The First-tier Tribunal (FTT) has found that the fact that a property had a septic tank on part of the grounds that also served adjacent properties did not mean that it was not wholly residential for stamp duty land tax (SDLT). It was an essential part of living in that area of countryside, and part of the garden and grounds of the property.

The taxpayers bought a property with two registered titles. One was for a home with outbuildings, pool and equestrian facilities. The other was for a few acres of adjacent land on which was a sewage treatment plant, facilitating the home and 10 neighbouring flats. The taxpayers initially paid the residential rate of SDLT on the purchase, but later made a claim for overpayment relief on the grounds that this was a mixed-use residential and non-residential property purchase. HMRC disallowed the claim, and the FTT agreed with HMRC.

The only parts of the plant visible on the surface were manhole covers, and two small structures containing the electrical controls and storage. An access road was used four times a year for the plant, and the costs of running it were split between the taxpayers and the owners of the flats. The taxpayers argued that they did not use this part of the property due to occasional smells, that as it is a shared facility it prevented their exclusive use of the property, and that they had tried to purchase the property without this area of land but this had not been possible.

The FTT found that regardless, this area was part of the “garden and grounds” of the property. The fact that there was a covenant between the taxpayers and the flat owners on waste treatment did not mean that this was a commercial agreement or venture. It was a fair split with no profits made. The treatment plant was an essential part of living in this area of countryside and, as HMRC had noted, it was part of one continuous plot next to a tennis court, and the two titles had a strong historic connection.

An interesting contrast between this and the recent Suterwalla case is in the use of land for horses. The area of land used for the plant had been used for horses until the taxpayer moved in on completion, which included third parties having use of the stables and manège. Although it was unclear whether or not that had been commercial in nature, the continuation of the arrangement might have strengthened the taxpayers’ case, given that in the Suterwalla case land let to a third party for equestrian use under a commercial arrangement resulted in a victory for the taxpayer on mixed-use treatment.

Bloom & Anor v HMRC [2023] UKFTT 00628 (TC)

Suterwalla v HMRC [2023] UKFTT 450 (TC)

From Tax Update August 2023, published by Evelyn Partners LLP

Former marital home not main residence after separation

The First-tier Tribunal for Scotland Tax Chamber (FTSTC) has agreed with Revenue Scotland (RS) that a property the taxpayer had moved out of had ceased being his main residence, although he had no other permanent accommodation and his children remained there with his separated wife. He was therefore not entitled to a refund of the additional dwelling supplement (ADS), as it was more than 18 months between leaving the first property and purchasing a second.

The taxpayer moved out of a jointly owned property in 2015 on the breakdown of his marriage. In 2019 he purchased a new home, and paid the ADS. In 2021 he transferred his interest in the first property to his former wife and received a capital sum. He then applied for a refund of the ADS.

RS refused as under the legislation the first property must be the claimant’s only or main residence at some point in the 18 months before the second property is purchased. The taxpayer appealed, arguing that despite personal circumstances meaning he could not live in the first property, it remained his main residence until purchase of the second, as he had no other permanent accommodation.

The tribunal was sympathetic, but upheld the RS decision. It was simply a fact that the taxpayer had not lived in the property in the 18 months in question, though the discussion of a dwelling was interesting. Although his children remained there, it was impossible under those circumstances to view it as his main residence. That being the case, the tribunal had no power but to agree that no refund of the ADS was due, as the legislation made no provision for extenuating circumstances.

Duran v RS [2023] FTSTC 2

From Tax Update August 2023, published by Evelyn Partners LLP

Property with paddock mixed-use for SDLT

The First-tier Tribunal (FTT) has found that a paddock adjacent to a property, on a separate title and leased out for grazing, was non-residential. The taxpayers won their appeal to have the purchase of house and paddock treated as mixed-use for SDLT.

The taxpayers, a married couple, bought a house and a paddock in one transaction, and filed an SDLT return on the basis that this was a mixed-use property, as the paddock was non-residential. HMRC failed in its argument that the property was sold as an equestrian property, of which the paddock was a necessary part, and that the paddock was part of the garden and grounds.

The house and the paddock were on separate titles.

In this case, the FTT found for the taxpayers. The property did not have any stables and consisted solely of the actual garden and tennis court, with the paddock not being an integral part and not visible from the house or gardens. A third party held a grazing lease over the paddock, which had separate access not over the rest of the property. The paddock had a separate title from the rest of the property and the taxpayers would not have bought it if it had been possible to purchase the rest of the property without it.

There have been a number of cases on the definition of a mixed-use property for SDLT, which have often been won by HMRC at tribunal, so this is an interesting case demonstrating what the FTT is more likely to see as non-residential use.

Sutterwalla & Anor v HMRC [2023] UKFTT 450 (TC)

From Tax Update July 2023, published by Evelyn Partners LLP

SDLT first-time buyers’ relief

HMRC has stated that it will be updating its guidance to clarify its position on when first-time buyers’ relief is available. HMRC considers that the following would prevent a person from being a considered a first-time buyer:

• a previous acquisition of a mixed property (eg, a shop with a flat above); or
• a previous acquisition of a part share in a dwelling.

However, HMRC’s position is that acquisitions of property made by trustees of a settlement in their capacity as trustees would not preclude them from qualifying for first-time buyers’ relief in relation to personal purchases made by those individual trustees.

Bad-smelling but still a dwelling

HMRC’s onslaught against those looking to avoid stamp duty land tax (SDLT) on buying their home continues. A recent case, Mudan, concerns the purchase of a house in very poor condition. 

Readers may remember the case of P N Bewley Ltd v HMRC [2019] UKFTT 65 (TC) about the purchase of a dilapidated bungalow, as it received coverage in the national press. In that case the bungalow was so riddled with asbestos that it had to be demolished. The First-tier Tribunal (FTT) found that it wasn’t suitable for use as a dwelling and the non-residential SDLT rates applied. 

HMRC guidance accepts that a dwelling that has become derelict is no longer residential. However, the relevant section of HMRC’s SDLT Manual draws a distinction between that and a property which is in need of modernisation or repair.

It seems reasonable that a property that can no longer be used as a dwelling should be treated as non-residential. It also seems fair that a property which needs a lick of paint and new carpet to make it pleasant to live in should still be residential. But where is the line drawn? 

The facts of the Mudan case [2023] UKFTT 317 (TC) are, in the literal sense, messy. In 2018 people were living in the house with 10 dogs and there was dog excrement in the house. The tenants knew they were going to be evicted so weren’t taking much care. The property was empty for a few months before Mr Mudan’s acquisition of it in 2019. By then it had been vandalised; there was an “unbearable smell ... mouse and rat droppings ... mice [seen] running around [and] loose wires”. Even squatters would probably have turned their noses up. 

Mr Mudan had lots of work to do: rewiring; new boiler; new roof to replace the one that was leaking; dealing with the bad smell and generally making the house fit for a normal family to live in.

Despite the extensive work needed, the Tribunal decided that at acquisition the property was suitable for use as a dwelling! The judge said: 

“I consider that a building which was recently used as a dwelling, has not in the interim been adapted for another use and is capable of being used [as a dwelling] again … will count as a dwelling, even though it is not ready for immediate occupation, unless the reason [for this is] so fundamental … that the work required to put these problems right goes beyond anything that might ordinarily be described as repair, renovation or ‘fixing things’…”

As examples, he suggested radioactive contamination or where there was a high risk of the building collapsing. He distinguished the Bewley case where things were so bad the bungalow had to be demolished.

The approach of the tribunals in these cases is clear: if it looks like a dwelling and (excuse the expression) smells like a dwelling, the residential rates will almost always apply. 

Contributed by Andrew Levene writing for BrassTax, published by BKL

Appeal on land transaction tax dismissed

A taxpayer who co-purchased a property with her daughter has lost her appeal against a charge to higher land transaction tax (LTT) rates on a second home. Although the property was for her daughter’s sole use, and she was simply assisting with the mortgage, there was no scope for an exemption in the legislation.

The taxpayer’s daughter did not meet the affordability requirements for a mortgage. The taxpayer took out the mortgage jointly with her to allow the property purchase to go ahead and was on the deeds as an additional owner. She was to come off the mortgage and deeds as soon as her daughter could meet the affordability requirements alone.

HMRC assessed the taxpayer to the higher rate of LTT, as she owned another home with her husband. She argued that she should be exempt in the circumstances, as she had no beneficial interest in the property and was only on the deeds for a short period. The First-tier Tribunal dismissed the appeal, as it had no power to deviate from the legislation, under which the higher rates clearly applied.

Hayes v WRA [2023] UKFTT 280 (TC)

From the weekly Tax Update dated 29 March 2023, published by Evelyn Partners LLP

Property occupied for 10 days not main residence

The First-tier Tribunal (FTT) has denied a claim for stamp duty land tax (SDLT) relief, finding that a property was not the taxpayer’s only or main residence. He had decided before moving in that his long-term home would be elsewhere, and only lived at the property for 10 days.

The taxpayer bought a property in need of renovation, and moved in that week. He slept there, moved his clothes in, and entertained friends, but moved out after 10 days. He sold the property to his parents after three months’ ownership. He claimed SDLT relief on the grounds that the new property he purchased was a replacement for his only or main residence. He did not register himself as the owner with the electricity company.

The taxpayer argued that he had intended to make the first property his permanent home, but decided to move on after he began to live there. The FTT found that he had made the decision to move elsewhere before moving in, as he had put down a holding deposit on the next property. Due to this finding about his intentions, when moving in, the property was never his only or main residence. The very short occupation contributed to this finding.

The FTT followed the decision in Goodwin, where a house occupied for five weeks was found to be temporary accommodation, rather than a permanent home, though this was in the context of capital gains tax. The mere fact that an occupation has occurred does not create a residence.

Cohen v HMRC [2023] UKFTT 90 (TC)

Goodwin v Curtis (Inspector of Taxes) [1998] STC475

From the weekly Tax Update dated 8 February 2023, published by Evelyn Partners LLP

LBTT relief refused as property held for too long

A taxpayer who sold his original home more than 18 months after purchasing a replacement has been refused a refund of the additional dwelling supplement (ADS). Although the sale was agreed within 18 months, the rules are clear that the sale must complete in that period to obtain a refund.

The taxpayer bought a second property (B) while he still owned property A. ADS was therefore charged on the purchase. He arranged for property A to be sold, then applied for an ADS refund. Revenue Scotland (RS) informed him that the refund could not be processed before completion. Completion ultimately occurred more than 18 months after the taxpayer had purchased property B, so a refund was refused. The land and buildings transaction tax (LBTT) rules only allow relief if the first property is sold less than 18 months after the second is purchased.

The taxpayer appealed, as the sale had been agreed within the 18-month period. The tribunal, however, upheld RS’s decision to refuse his claim, as the rules were clear and there was no scope for discretion in the legislation.

Tavendale v RS [2023] FTSTC 1

From the weekly Tax Update dated 8 February 2023, published by Evelyn Partners LLP

Gardeners’ question time: SDLT and CGT

The First-tier Tribunal (FTT) case of Sexton & Sexton v HMRC was about stamp duty land tax (SDLT). But it is perhaps most interesting for its relation to capital gains tax (CGT) private residence relief.

The taxpayers bought a leasehold interest in a flat in the Royal Borough of Kensington and Chelsea. As is not uncommon in that part of the world, ownership of the flat brought with it entitlement to make use of a private communal garden. Legally that was an easement over the garden – itself an interest in land.

It was argued on behalf of the taxpayers that the easement was not ‘residential property’ – and therefore that, their purchase being one of mixed residential and non-residential property, the non-residential rates of SDLT applied.

The FTT disagreed. The main subject matter of the transaction was the flat. That was plainly residential property. The easement fell to be subsumed within it and ignored for the purposes of calculating the rate of SDLT, because it was appurtenant to the leasehold interest in the flat.

Alternatively, if it was correct, as argued on behalf of the taxpayer, that the main subject matter of the transaction had to be treated as comprising two legal interests (the flat and the easement) one had to consider whether the easement itself was also ‘residential property’.

‘Residential property’ is defined by the law to include (inter alia):

• land that is or forms part of the garden or grounds of a dwelling; and
• any right over land that subsists for the benefit of a dwelling.

The FTT thought it clear that the easement was precisely a right over land that subsisted for the benefit of the flat and was therefore ‘residential property’. The taxpayer had sought to read in a requirement that, to fall within the definition, a right had to benefit only the dwelling in question.

The FTT had two answers to that. For one thing, the FTT could find nothing in the definition to suggest that a right fell outside it, if it also subsisted for the benefit of other land. And in any event the easement in question here benefitted the Sextons’ flat and no other; the fact that owners of other flats might have identical easements over the communal garden was neither here nor there.

Not altogether a surprising decision on SDLT. So, where’s the CGT angle?

It’s this. The FTT considered that the communal garden did not form part of the garden of the flat: there had to be ‘some kind of link’ between the garden and the flat for the garden to be the garden ‘of’ the flat, and – without saying what link was sufficient – the FTT opined that there was insufficient link in the present case. That sits uneasily with HMRC’s long-held (and, we think, plainly correct) view of the circumstances in which land physically separated from a dwelling may be considered to be its garden for the purposes of CGT ‘main residence’ relief:

“If the facts show that land which is physically separated from the residence is naturally and traditionally the garden of the dwelling-house and it would normally be passed on as such on conveyance, relief should be allowed. For example, in some villages it is common for the garden to be across the street from the dwelling-house. This separation should not be regarded as a reason for denying relief if it can be shown that the land was naturally and traditionally the garden and grounds of that house.”

Contributed by David Whiscombe writing for BrassTax, published by BKL

Land and buildings transaction tax appeal dismissed as property was not taxpayer’s main residence

A taxpayer who did not manage to move into a property as planned due to the pandemic has been refused repayment of the additional dwelling supplement (ADS) as the property was never occupied as a main residence.

The taxpayer decided to downsize her home. She purchased a smaller property in Edinburgh in March 2020 while still owning the first property. The start of the pandemic prevented her from renovating the second property until early 2021, so she was not able to move in, instead selling both properties in October 2021. She sold the first on the same day she purchased a new home and the second was sold 11 days later.

The taxpayer had paid the ADS on the purchase of the second property, but requested a repayment on the grounds that she had not intended to own the two properties for more than 18 months and her plans had been delayed by the pandemic. The tribunal agreed with Revenue Scotland’s decision to refuse repayment. Despite unforeseen circumstances, the fact that the taxpayer had never occupied the second property prevented repayment. Both HMRC and the Tribunal judges agreed the position was unfair and unfortunate, but the Tribunal did not have to “arrogate to itself a jurisdiction which Parliament has chosen not to confer on it”.

Tan v RS [2022] FTSTC 10

From the weekly Tax Update dated 19 January 2023, published by Evelyn Partners LLP

SDLT and couples

If you already own a house (or other dwelling), the stamp duty land tax (SDLT) you pay on buying another one is usually increased by an amount equal to 3% of the price you pay.

If you are married or in a civil partnership, the rule reads across ownership between you and your spouse or civil partner. But there is no similar treatment if you are merely cohabiting. Let’s consider some examples.

David and Ruth are married and jointly own their home. They are thinking of investing in a buy-to-let property or a holiday home. Any purchase will be liable to the 3% surcharge, regardless of whether the property is bought by David, by Ruth, or jointly.

That is, perhaps, not a surprising result, since whoever buys will already own an interest in one dwelling and will be acquiring an interest in a second one. But the same applies even if David is the sole owner of the marital home and Ruth buys the new property because ownership of property by one spouse is treated for this purpose as ownership by the other.

Laura and Tommy, on the other hand, are a cohabiting couple. Again, if they jointly own their home and buy another dwelling, the 3% surcharge will apply. But if Tommy buys the new property and Laura is at that time the sole owner of their existing home (even if this is because Tommy has opportunely transferred his interest to her), the surcharge will not apply.

The opportunities can be more extensive. William and Kate, who cohabit, jointly own a portfolio of investment properties as well as their family home. They’re planning on buying a new home, but keeping the existing one to let out. If Kate transfers her interest in the current home to William and then buys the new home, the surcharge will not apply (even though she owns other dwellings) because she will fall under the exemption from the surcharge for a ‘replacement main residence’. And if William does not let the existing home, but retains it as a secondary residence for the couple, there is scope for exemption from capital gains tax (CGT) to apply in due course on disposal of each of the properties – again, something that would not be available if William and Kate were married.

You might imagine that this ‘marriage penalty’ would be counterbalanced by some beneficial SDLT treatment on the transfer of properties between spouses or civil partners, cognate with the rules on such transfers that apply for the purposes of CGT. No such luck: SDLT treats transfers between spouses and civil partners in exactly the same way as transfers between unconnected persons. In particular, transferring by way of gift a property that is subject to a mortgage can give rise to a charge to SDLT, even where the transfer is between spouses or civil partners.

For completeness, we should add that everything we say above relates to property in England or Northern Ireland. If the property is in Scotland, land and buildings transaction tax applies, the surcharge is 6% and the conditions for its imposition are slightly different; if the property is in Wales, recent changes to the land transaction tax rules that apply there make the position complex, with the effective rate of surcharge varying with the cost of the property.

Contributed by David Whiscombe writing for BrassTax, published by BKL

Taxpayer win on mixed use SDLT claim

Mixed use relief for stamp duty land tax (SDLT) has been granted for a property purchase where an area of land purchased with the property was let for agricultural use.

The taxpayer bought a house that came with a separate annexe and about 39 acres of grounds. Part of the land was let for grazing and hay cutting, and had been so for some time. The informal arrangement was clarified with a lease before the purchase. HMRC argued that this was just part of the grounds and did not constitute mixed use of the property. The taxpayer could still enjoy the part of the grounds being used for grazing.

The First-tier Tribunal (FTT) found for the taxpayer that this parcel of land was distinct from the house and grounds, so made the overall purchase mixed use for SDLT. It was a distinct area of the property apart from the grounds and the farming equipment, such as a feeding station and water troughs, showed that it was used agriculturally rather than personally.

There were, importantly, grazing and Woodland Trust agreements in place at the time of purchase and the FTT considered that the relevant areas of land were used for separate purposes and self-standing functions so failed to meet the tests as residential property. Their use or function does not support the use of the building concerned as a dwelling.

Withers v HMRC [2022] UKFTT 433 (TC)

From the weekly Tax Update dated 14 December 2022, published by Evelyn Partners LLP

Taxpayer loss on multiple dwellings relief

The Upper Tribunal (UT) has upheld a First-tier Tribunal (FTT) judgement that multiple dwellings relief (MDR) cannot be claimed for land with planning permission to build dwellings, but with no existing dwellings.

The taxpayers bought separate pieces of land with planning permission to build dwellings. One purchased empty land and the other a parcel of land that had commercial buildings on that were to be demolished. The FTT denied MDR, as the main subject of each purchase was the land, not the planning permission. No interest in dwellings had been acquired, which is a requirement to claim MDR.

The UT agreed. The taxpayers had argued that the land was undergoing a process of construction, so should be treated as having dwellings on it. The UT preferred HMRC’s more restrictive interpretation, that the land needed to have a dwelling under construction. The taxpayers had only dug bore holes and begun clearing the land respectively, rather than beginning work on an actual dwelling, so despite the fact that these were preparatory steps, no MDR was due.

Ladson Preston Ltd and AKA Developments Greenview Ltd v HMRC[2022] UKUT 301 (TCC)

From the weekly Tax Update dated 14 December 2022, published by Evelyn Partners LLP

Taxpayer wins SDLT appeal on multiple dwellings relief

Multiple dwellings relief (MDR) has been granted on the purchase of two adjacent properties, one a house and one that was being commercially let at the time of purchase. Mixed use relief was refused, as the lease was arranged specifically to avoid stamp duty land tax (SDLT).

The taxpayer purchased a house and a separate property that happened to be on an adjacent piece of land. This second property had previously been an artist’s studio, converted from a garage. He was advised that SDLT relief would be available if it was being used commercially when he bought it, so prior to the purchase, he was involved in finding a photographic studio that agreed to take a commercial lease on the property for nine months. The taxpayer claimed mixed use relief from SDLT.

HMRC argued that, despite guidance stating that commercial tenancies would cause mixed use relief to apply, this did not have the force of law. It argued that the test should be whether or not the property was suitable for use as a dwelling, as the guidance had subsequently been amended to say. The FTT disagreed that, due to the lease, the property was not capable of being occupied as a dwelling at the point of purchase. It also found, however, that the anti-avoidance provisions meant that the lease should be ignored. In a further twist, the taxpayer was, however, allowed multiple dwellings relief – despite not having claimed it – as there is no statutory requirement to claim this in an SDLT return nor amendment to such.

Ridgway v HMRC [2022] UKFTT 412 (TC)

From the weekly Tax Update dated 7 December 2022, published by Evelyn Partners LLP

Estate loses appeal on domicile

The First-tier Tribunal (FTT) considered a domicile case with a complex family history and found that the taxpayer died domiciled in England and Wales, his home for the last 43 years of his life, despite him declaring an Indian domicile. His plans to return to India were only vague and were not supported by evidence.

The taxpayer was born in pre-partition India, in the part that is now Pakistan (Karachi). His parents were living in Tanzania at the time, but his mother returned to her home city of Karachi for the birth. His father was born in the section that is now India, moved to Karachi when a child, then moved to Tanzania after his marriage. The taxpayer was sent to Karachi for the latter part of his education. Partition took place while he was at university in Karachi, as a consequence of which he moved to present-day India to complete the course. After graduation he returned to Tanzania.

When the political situation in Tanzania deteriorated, he and his family moved to India, his wife’s home country, and a year later, in the early 1970s, they moved to the UK, as did much of his family. He had made a UK will for UK assets and an Indian will for non-UK assets.

His executors contended that he had retained a non-UK domicile for inheritance tax, as he had only moved to the UK because he could not secure employment in India and intended to return at the end of his working life. On his retirement he had delayed his return due to his own and his family’s medical issues. There was limited documentation available. On an HMRC form describing his domicile, he had described himself as domiciled in India, noted that he could stay in a relative’s flat when in India and that he intended to leave the UK when his personal affairs and health allowed.

The FTT found that he had acquired a domicile of choice in England and Wales. He had limited connections to India, with only two visits there during his 43 years of life in the UK before his death aged 87. Realistically, given his family connections in the UK, age and state of health, he would not have been preparing to leave the country. He had no connection at all with modern Pakistan and had never lived in India for longer than his three years at college. The FTT commented that his plans to move to India were only a vague idea and were not supported by the evidence of his life overall.

The FTT made no finding on his country of domicile of origin.

Shah v HMRC [2023] UKFTT 539 (TC)

From Tax Update July 2023, published by Evelyn Partners LLP

Statutory residence test

There is an awful lot of anxiety surrounding the rules for residence – which is hardly a surprise as it is the main determinant for liability for UK taxes. And now that being deemed domiciled after 15 years of residence can expose you to worldwide income tax, capital gains tax and inheritance tax, the result of inadvertently being UK resident can be a disaster – or perhaps a welcome and unexpected addition to the public revenue, depending on your point of view.

Many people assume that if they stay below 90 days in the UK they will be OK – and are pleasantly surprised to find that the day count limit is sometimes 120 (eg, for an arriver who is retired and does not have a UK resident spouse). 

They are rather less happy to learn that the limit might actually be 45 days – which would be the position if they are a ‘leaver’ with three UK ties – or maybe less than 45 days because the deeming provision would apply in calculating the UK days.

It gets worse because if the automatic residence test applies it could be only 30 days. This applies if:

1. the taxpayer has a home in the UK which is available to them for more than 90 consecutive days and they are present there on at least 30 separate days during the year; and
2. there is a period of 91 consecutive days (and at least one of those days falls within the tax year) throughout which they either had no home overseas or if they had one, they were present there for fewer than 30 separate days during the year.

There is real danger here. If the taxpayer has a home abroad where they spend more than 29 days and a home in the UK where they spend more than 29 days, they will be safe from the application of the automatic residence test on this point. However, a holiday home does not count as a home for this purpose, so if HMRC can argue that the foreign home is only a holiday home, they would only have one home; that home is in the UK – and 30 days will make them resident. End of story (unless the automatic non-residence test applies).

Other unexpected results can arise in the event of death. The most detailed plans and the most careful attention to the day count can be completely upset if the taxpayer dies. When a person dies during the tax year there are some special rules. (That always amuses me; how are you supposed to die other than during the tax year – but never mind.) One such rule relates to the reduced day count in the year of death.

Let us assume that the client is an arriver with two UK ties and therefore has a limit of 120 days for the year. The taxpayer carefully plans their days and knows that they will be leaving the UK on 31 January (for the rest of the tax year) and by then they will have had 112 days in the UK – well within the 120 limit, so that’s all fine.

Well, maybe. They had better look after themself because if they die during February the day count limit is reduced to 110 (and if they were to die in January it would be only 100 days) – so they would be resident in that year after all. 

It is bad enough that they are resident in the year of death and exposed to income tax and capital gains tax – but if they were relying on this year of non-residence to avoid being deemed domiciled, this could bring their worldwide assets into charge to inheritance tax. Um. Best cancel the skydiving and base jumping until March perhaps.

Contributed by Peter Vaines, Field Court Tax Chambers

Residence appeal dismissed as ties to UK not ‘substantially loosened’

The First-tier Tribunal (FTT) has upheld a £1m capital gains tax (CGT) assessment on a taxpayer who moved to Australia in 2012. Under the pre-statutory residence test rules, he had not reached the point where his ties to the UK were ‘substantially loosened’ until after the start of the 2012/13 tax year.

The taxpayer moved to the UK in 1988, but always intended to return to Australia in the long-term and bought property there. He reached the decision to return in 2010 and moved to Australia in October 2011. He returned to the UK temporarily on 29 April 2012 to make final arrangements for his UK assets, but thereafter visited infrequently. HMRC assessed him to CGT of more than £1m in respect of his UK property disposals in 2012/13. As this was before the statutory residence test was introduced, he would be UK resident if his ties to the UK had not been ‘substantially loosened’ before 6 April 2012. He had been under the impression that he could spend up to 45 days in the UK in a tax year without becoming resident and declared Australian tax residency in 2012.

The FTT considered the course of his gradual move to Australia. It took into account his professional work, including appearances on reality TV in the UK and Australia, the running of his businesses in the UK and Australia, and the properties he owned in each country. It also looked at the fact that he changed his executive assistant to an Australian resident in late 2012, the dates his personal belongings were shipped as well as his pets, and cars were moved, given away, or sold. Further considerations were administrative points such as closing of his bank account, council tax and the electoral register, and the details of his travel and residence declarations during that time.

Overall, his appeal was dismissed. The FTT accepted that in 2011/12 he had increased his ties to Australia substantially, but this did not necessarily mean that he ceased UK residence. He still had the majority of his belongings in his UK home after 6 April 2012 and was chairman and shareholder of his UK business. His girlfriend and his dog were still in the UK until after the relevant date, and many matters of everyday life such as his registration with a UK doctor were still active. It was only after this that his ties met the ‘substantially loosened’ test.

Lyons v HMRC [2023] UKFTT 294 (TC)

From the weekly Tax Update dated 22 March 2023, published by Evelyn Partners LLP

Taxpayer found to be UK domiciled

In a lengthy domicile case, the First-tier Tribunal (FTT) has found that a taxpayer whose parents were immigrants to the UK was domiciled in England. His domiciles both of origin and dependency were English, as his parents had acquired that domicile. Regardless, the taxpayer would have been found to have an English domicile of choice based on his life as an adult.

The taxpayer argued that he was domiciled in Austria. He was born in England to married parents, so took his father’s domicile at the time of his birth automatically as his domicile of origin. If his father’s domicile had changed before the taxpayer was 16, he would also have acquired the new domicile as a domicile of dependency. The taxpayer’s father died in 1968. As the taxpayer was still a minor at this point, if his mother’s domicile was different, he would have taken his mother’s domicile as a domicile of dependency. The fourth time at which his domicile could have changed to an English domicile of choice was as an adult. Due to these circumstances, if HMRC could prove that either of his parents had acquired an English domicile before he was 16, or that he had done so in his own right thereafter, the taxpayer would be UK domiciled.

The FTT considered the history of the family.

The taxpayer’s father had an Austrian domicile of origin. He moved to England in 1938 aged 20 to escape Nazi persecution and never returned to Austria. He died unexpectedly in 1968. The FTT found that he had acquired a domicile of choice in England by the time of the taxpayer’s birth and maintained it until his death. His wife had suggested that he intended to retire to France, where he enjoyed holidaying, but the evidence of a fixed intention was not strong and he had severed all ties with Austria. Although he lived in an immigrant community, he was settled in England, albeit a small part, and his family life was in England. The taxpayer’s domicile of origin was therefore English.

The taxpayer’s mother started with an Irish domicile of origin. She moved to England aged 18, and met her future husband in London. On her marriage in 1954 she automatically acquired her husband’s domicile under the pre-1974 domicile of dependency rules. Following her husband’s death she remained in England, although due to financial troubles was initially in no position to move, but ultimately she raised her three children there and married again in her late fifties. The FTT found that her domicile of choice had become English by the time the taxpayer was 16. She never moved back to Ireland, despite having the opportunity in later life, and was settled in England. The taxpayer would have therefore acquired an English domicile of dependency from her had he not had the English domicile of origin already.

The taxpayer therefore lost his appeal, but for completeness the FTT considered whether or not he would have acquired an English domicile of choice had he succeeded on the other grounds. It found that he would. Although he had applied for Israeli citizenship, and intended to spend more of his time there than anywhere else in future following his divorce, he had lived in the UK all his life, married and raised a family here. At the time in question he had no home elsewhere and had visited Israel only twice.

Coller v HMRC [2023] UKFTT 212 (TC)

From the weekly Tax Update dated 9 March 2023, published by Evelyn Partners LLP

Domicile could not be determined at preliminary hearing

In the latest stage of the taxpayer’s long running dispute with HMRC over his domicile, the First-tier Tribunal (FTT) has decided that his domicile cannot be determined separately from tax due by the FTT at a preliminary hearing.

The Court of Appeal previously found, against the taxpayer, that partial closure notices (PCNs) cannot be issued without a calculation of the tax due. Taxpayers found by HMRC to have a UK domicile will therefore not be able to appeal this decision pending determination of the tax at stake, and will have to supply details of overseas income and gains. He was denied permission to appeal this decision to the Supreme Court.

Separately, HMRC issued a discovery assessment, for a significant amount of tax (just under £10m), for the 2013/14 tax year. 

The taxpayer appealed against the assessment, on the grounds that:

(a) he had not acquired a domicile of choice within the UK (“the domicile issue”); and

(b) even if he had, the amount assessed is excessive (“the liability issue”) because his overseas income in that year was approximately £50,000.

In this case, the FTT considered whether or not the domicile issue could be determined as a preliminary issue. The FTT weighed up the various factors and dismissed Mr Embiricos’s application for a preliminary hearing on domicile. A delay argument was not sufficient, as the full hearing would likely be only six months later than a preliminary hearing would have been, and the delay and costs might be greater overall, if the preliminary judgement was appealed. In summary, allowing a preliminary hearing would also not be in keeping with the overall objective to deal with cases fairly and justly due to these points.

Embiricos v HMRC [2022] UKFTT 464 (TC)

From the weekly Tax Update dated 20 December 2022, published by Evelyn Partners LLP 

Special dividend part income and part capital

The First-tier Tribunal (FTT) found that a US special dividend paid on merger should be treated for UK tax as consisting of the same ratio of income to capital as under the US tax documents.

When Dr Pepper, a US company, went through a merger, a special dividend was paid out in July 2018. This taxpayer declared the whole payment as capital. The documentation he had been given about the dividend described it as part income and part capital, in roughly a 30:70 ratio.

When HMRC received this information under international information sharing agreements, it enquired into his return, and issued a discovery assessment treating the dividend as part income in the same proportion as the documentation. On internal review, another HMRC officer varied this to assess the whole dividend as income for UK tax purposes.

The FTT decided that the original 30:70 split was the correct treatment, so the original discovery assessment was upheld, and HMRC criticised for the review decision. The tax treatment in UK law derives from the character of the dividend under US law, which was clear here. The ‘capital’ part of the dividend was treated for US tax purposes as a capital payment, and specifically not paid out of earnings and profits.

Buckingham v HMRC [2023] UKFTT 358 (TC)

From Tax Update May 2023, published by Evelyn Partners LLP

Enterprise investment scheme requirements not met

The First-tier Tribunal (FTT) has upheld HMRC’s decision that shares did not qualify for the enterprise investment scheme (EIS). Although a qualifying trade was in motion, and plans were being made to grow the business, disqualifying arrangements were in place.

The taxpayer, a company that had been incorporated to carry on the trade of developing and producing an animation show, issued various tranches of shares. It first obtained advance assurance from HMRC that these could be treated as qualifying for EIS relief or relief under the seed enterprise investment scheme (SEIS). HMRC issued compliance certificates for the first few tranches, but following a review it refused to issue compliance certificates for the more recently issued tranches. The taxpayer appealed.

HMRC’s grounds for refusal were that the company did not meet the risk to capital condition, that there were disqualifying arrangements and that the company was involved in an excluded trade.

The FTT upheld HMRC’s decision to refuse to issue the certificates, but for slightly different reasons. It analysed the activities and running of the company in some detail, along with the outcome of earlier FTT cases involving the same group that had similar characteristics and legal issues. It agreed with the company that at the relevant time it had had the objective to grow and develop its trade in the long term, and that it had been engaged in a qualifying trade. The company held intellectual property rights to the series that were growing in value and serious plans were in motion to develop it. The reason that the FTT agreed with HMRC’s decision overall was that it also found that there were disqualifying arrangements. Sums raised by the share issues were paid to and for the benefit of a third party who had helped to set up the arrangements. The taxpayer’s appeal was therefore dismissed.

Hoopla Animation Limited (formerly known as Daisy Boo and Monkey Too Limited) v HMRC [2023] UKFTT 24 (TC)

From the weekly Tax Update dated 25 January 2023, published by Evelyn Partners LLP