Property tax

SDLT appeal dismissed on property transfer to company

The First-tier Tribunal (FTT) has dismissed an appeal from a taxpayer who accidentally incurred a 15% stamp duty land tax (SDLT) charge after a property chain collapsed. Placing his home in a company he incorporated while still living in it meant that the charge was due, despite him not knowing about the charge and having done this to secure a mortgage for his onward purchase.

The taxpayer was attempting to sell his family home, and move to a larger house, but at the last minute their purchaser pulled out and the chain collapsed. To allow them to still move, the taxpayer took his mortgage adviser’s advice to transfer the original property into a company, then take out a mortgage in the company, as this made it possible to borrow enough money rather than trying in his own name.

The company was incorporated, purchased the original home and paid SDLT. The taxpayer remained living there for almost a year, including a few months after a new property was purchased as works were carried out. HMRC investigated the first SDLT return and issued a closure notice such that the higher rate of SDLT was due for a property transferred to a company that a non-qualifying person was allowed to inhabit.

The taxpayer accepted that he had lived in the property after the transfer to the company, but said that he would never have done so had he known about the potential charge. Neither his mortgage adviser nor his solicitor mentioned it. He had paid full market rent to the company on their advice and had only stayed there as he could not find another suitable property to rent until the new one was purchased. His mortgage required the property to be rented out from day one. He argued that the lack of a grace period meant that the law was unfair.

The FTT agreed with HMRC and dismissed his appeal. As sole shareholder and director of the company owning the property, his occupation of it meant that the charge was due. The fact that he did not understand the rules did not prevent them from applying. Parliament had chosen not to provide for a grace period in the legislation and the FTT could not go behind that and did not have the statutory powers to consider fairness in this case.

Mayfair Avenue Ltd v HMRC [2024] UKFTT 430 (TC)

From Tax Update July 2024, published by Evelyn Partners LLP

Residence and domicile

Taxpayer loses appeal on business investment relief

A UK resident, non-domiciled individual incorporated a UK company and became the sole shareholder and director. He invested £1.5m in it, which was overseas income he brought into the UK a week before incorporation. Having taken advice in advance, he claimed business investment relief (BIR), but this was denied by HMRC, as the taxpayer had drawn on his director’s loan account with the company to pay personal expenses. The total loan was just over £70,000, drawn in the tax year after the investment.

The taxpayer argued that he should be eligible for BIR because although he had extracted value from the company, he had not extracted net value, as the interest-free loan was subject to tax. In addition, the director’s loan was provided in the ordinary course of business on arm’s-length terms.

HMRC argued that extraction of value meant simply that. It did not mean adding a word to become ‘net’ extraction of value. Despite the difference between the £1.5m investment and £71,000 loan, even a single payment from the company to the taxpayer for personal expenses was a receipt of value. Alternatively, the taxpayer was better off financially due to the loan so had received net value.

There was no dispute about the taxpayer’s honesty – he had chosen to use funds from overseas rather than available funds in the UK because he believed that the relief would be available. He had used the director’s loan in the same way as at his previous employer, without realising that the relief could be compromised. Sometimes he paid company expenses personally, sometimes he used the company cards for his expenses, despite having other funds available. He intended to reimburse the company, but this had not happened by the end of the tax year.

The FTT agreed with HMRC and dismissed the taxpayer’s appeal. Extraction of value did not mean net value on the natural reading of the legislation. Acknowledging that this could lead to strange outcomes with trivial extractions of value, it considered whether or not this accorded with the purpose of the legislation, and concluded that it did. There was no minimum set in the legislation, and the language was too strong to justify departing from it because of a strange outcome. In this case, the loan was not on arm’s-length terms, as an interest-free unsecured loan on an informal basis.

D’Angelin v HMRC [2024] UKFTT 462 (TC)

From Tax Update July 2024, published by Evelyn Partners LLP

FTT finds that remittances were taxable

The First-tier Tribunal (FTT) ruled that remittances were taxable. The fact that the taxpayer did not benefit personally from the money did not change the tax position.

HMRC enquired into the return of a UK resident but non-UK domiciled taxpayer who had claimed to be taxed on the remittance basis. It considered taxable remittances were made, which had not been reported on his tax return. These include:

• transfer to the taxpayer’s son’s account (over 18) for his son’s personal use;
• transfers to friends and family in the UK, who were not relevant persons, for their own use;
• direct payment of his son’s university expenses;
• gift of jewellery for a UK resident who was not a relevant person; and
• jewellery purchased for the taxpayer’s wife.

Some were transfers from his overseas bank direct to a recipient, others were purchases made using his offshore credit card. The overseas accounts were mixed funds with foreign income and gains, so HMRC argued that these were remittances of those amounts.

The taxpayer appealed against the discovery assessment issued by HMRC and the closure notice that followed. He argued first that he derived no personal benefit from these transactions. The FTT dismissed this, finding that personal benefit was irrelevant in these circumstances and the key point was if he had ‘brought to’, ‘received’ or ‘used’ money or other property in the UK.

The FTT also found in favour of HMRC in relation to the payments made by credit card and purchases of jewellery.

The taxpayer argued that as it is established that a bank account is a debt owed to the account holder by the bank, money received from a bank is new property, rather than the original property, and no money therefore passes in an electronic bank transfer. It would follow that these automatic transfers could not be remittances of his property. The FTT also dismissed this argument, applying a purposive interpretation to the legislation. The FTT was satisfied that he had brought money to the UK when he initiated the bank transfers from his non-UK account into the UK accounts of non-relevant persons.

The FTT did, however, find that the discovery assessment could not be upheld as HMRC had not shown that the taxpayer’s behaviour was careless or deliberate. This meant that that year fell out of charge, so only the period covered by the closure notice could be assessed.

Alimahomed v HMRC [2024] UKFTT 432 (TC)

From Tax Update July 2024, published by Evelyn Partners LLP