Capital gains tax

Entrepreneurs’ relief not available

The First-tier Tribunal (FTT) has found that entrepreneurs’ relief (ER, now known as business asset disposal relief) was not available for the sole beneficiary of a trust as the company was not his personal company.

A company with one share was incorporated in 2009. The sole shareholder and director (P) transferred this to the trust in 2012, and it was sold to a third party in 2015. P was the principal beneficiary of the trust. The trustees claimed ER on the sale, but the claim was denied by HMRC.

The FTT dismissed the trustees’ appeal. It was accepted that P was a qualifying beneficiary of the trust in that he was a director of the company and the principal beneficiary, but the company was not his personal company. This was because he had not held a 5% shareholding in his personal capacity for a year in the 3 years before the sale. As there was only one share, the trustees owned 100%. The fact that P could exercise the voting rights for the trust did not alter the position. He had that power only jointly with his co-trustee, and had to consider the capital beneficiary in his decisions, as well as himself as income beneficiary. More than £250,000 of CGT rested on this decision.

Trustees of the Peter Buckley Settlement v HMRC [2024] UKFTT 00029 (TC)

From Tax Update February 2024, published by Evelyn Partners LLP

CGT relief not available

The First-tier Tribunal (FTT) has found that private residence relief (PRR) was not available on a house sale, as there was no evidence that the taxpayer had ever lived there.

The taxpayer owned a property for just over six years before selling it in 2016. HMRC’s case was that he remained living with his parents throughout the period of ownership. He claimed that he lived there together with his partner and a tenant. It was common ground that he lived with his parents before the purchase and after the sale.

The FTT had to determine whether or not he had resided there with the requisite degree of permanence or continuity. The taxpayer did not produce any documents showing his address as the property. His address with the electoral roll, HMRC, and his bank remained that of his parents throughout, which he explained as not seeing the need to change address. Most information was received online and he could pick up post from his parents easily. He explained that his housemate was responsible for the council tax.

The FTT found for HMRC and denied PRR. The burden of proof was on the taxpayer, and he had no evidence that he had lived there, so had not discharged it. He had failed to produce, for example, witness statements from the tenant or his partner, or his marriage certificate or payslips that would cover the claimed time at the address.

Patwary v HMRC [2024] UKFTT 53 (TC)

From Tax Update February 2024, published by Evelyn Partners LLP

Property tax

SDLT saving scheme for house purchase defeated

The Court of Appeal (CA) has upheld an Upper Tribunal (UT) judgement that taxpayers who purchased a house in a company, which was then distributed to them due to a reduction in share capital, were personally liable for stamp duty land tax (SDLT) on the purchase. The arrangements made meant that they had the power to call for conveyance, as well as the company.

The taxpayers, a married couple, subscribed for all the shares in a newly incorporated company. It used the funds to place a deposit on a house; then, on completion of the purchase, it reduced its share capital to £2, making a distribution in specie of the house to the taxpayers. The original subscription to the company was made by the taxpayers giving promissory notes payable on the day of completion of the house purchase. No SDLT returns were made, on the basis that there was no consideration paid for the transfer of the house to the taxpayers. HMRC assessed the taxpayers for SDLT as though they had purchased the house personally.

The First-tier Tribunal (FTT) and UT found that the arrangement constituted a transaction under which a person other that the purchaser (the company) was entitled to call for conveyance. The distribution was contingent on the house purchase being completed. The FTT found that the consideration was the subscription to the company, but the UT found that it was the slightly lower amount the company paid as a deposit for the house, due to conveyancing costs.

The CA agreed with the UT. It looked at the scheme as a whole, noting that the deposit paid by the company came from the money subscribed by the taxpayer for shares. The taxpayers accepted that the scheme did not work, but brought two procedural points. They argued that HMRC could not bring its point that the company and taxpayers were connected persons as this was not raised at the FTT, and the UT had decided not to deal with it. The CA found that that was not a refusal to admit the point and that as it was a pure point of law without needing fact-finding, it was admissible. They also argued that HMRC should have made a separate determination on the point they now relied on, relating to a notional land transaction by the taxpayers of the land rather than the real acquisition of the land by the company. The CA found that this notional transaction was under a deeming provision, it did not need a separate determination.

Brown v HMRC [2024] EWCA Civ 92

From Tax Update February 2024, published by Evelyn Partners LLP