Property tax
Compensation and interest chargeable to income tax
The First-tier Tribunal (FTT) has found that HMRC was correct to tax money paid out for mis-selling of interest rate hedging products as compensation.
A pair of brothers purchased interest rate hedging products (IRHPs) from a bank, to protect themselves against potential interest rate fluctuations on loans that they had taken out. The payments were deducted as expenses from their property business profits. Ultimately, it turned out that they had been mis-sold the IRHPs. They were given redress payments consisting of a basic sum, being the difference between the cost of the product and the cost of a more appropriate product, plus interest.
HMRC raised closure notices on the basis that the compensation and interest was taxable. The brothers argued that as the payments were made for the ‘opportunity cost in losing the ability to invest in different hedging products’ rather than as compensation, they were not taxable.
The FTT found that the payments were compensation for business expenditure that the brothers would not have incurred. The fact that they were calculated by reference to the cost of the correct product did not make them payments for loss of opportunity – this was simply the way the Financial Conduct Authority set up the scheme. The FTT dismissed the appeals and found that income tax applied to the whole of the payments and interest.
Hackett & Anor v HMRC [2024] UKFTT 749 (TC)
From Tax Update September 2024, published by Evelyn Partners LLP
FTT rules that property consisted of two dwellings
The First-tier Tribunal (FTT) has ruled that a taxpayer was entitled to stamp duty land tax (SDLT) multiple dwellings relief (MDR) on a building as it was capable of occupation as two separate dwellings, with their own entrances, kitchens and bathrooms.
A taxpayer bought a property and claimed MDR on the grounds that it consisted of two dwellings. HMRC challenged the SDLT return, arguing that this was one dwelling.
The FTT was supplied with a full bundle of evidence with photos and plans showing the use of the property.
The property was internally subdivided into one one-bedroom and one four-bedroom home. Each had a separate outside entrance, and each had full facilities including kitchen and bathroom. They had independent fuse boxes, though from one electricity cable. The boiler was shared, and there were two electricity meters but one bill, as for the oil supply. The water supplies were separate. There was only one postal address and council tax account, and they shared the same title number.
The property had been marketed as a sole dwelling. It had been used most recently as holiday lets, but before that as one family unit. The new owner intended to let out one of the purported dwellings.
The FTT found that the property consisted of two dwellings, each suitable for use as a single dwelling. The physical configuration and facilities were very important to this finding. Internal doors between the two dwellings existed, but were substantial and lockable so did not make this one dwelling.
Winfield v HMRC [2024] UKFTT 734 (TC)
From Tax Update September 2024, published by Evelyn Partners LLP
Residence and domicile
Taxpayer’s appeal on residency status dismissed
The Upper Tribunal (UT) has found that the decision made by the First-tier Tribunal (FTT) in relation to a taxpayer’s residency status should be upheld.
A taxpayer, who was born and raised in the UK, moved to Belgium in early 2006 to develop his European business further. He returned to the UK in 2013. HMRC argued that he remained a UK resident for tax purposes.
Initially he had rented a flat in Belgium and then purchased a property which he moved into in November 2006. His wife visited, but largely lived in the UK. He took some steps to transfer his life to Belgium, such as closing some UK bank accounts and opening Belgian ones, resigning from UK clubs and notifying his new address to organisations and contacts.
The FTT, however, found for HMRC that he remained a UK tax resident under the old common law rules that applied at the time, as this was prior to the statutory residency test being introduced. His wife remained in the UK family home, which he visited despite staying in hotels overnight. He saw friends in the UK, and attended sporting fixtures there. Although he spent relatively little time in the UK and there had been a clear change in the pattern of his life, his visits were frequent and there was not a sufficient loosening of his ties with the UK.
The FTT also found that for the purposes of the double tax treaty, his UK property remained his permanent home. The fact that he had transferred it solely into his wife’s name and did not stay there overnight was an artificial step that carried no weight. His personal and economic interests remained in the UK, which was his centre of vital interests, meaning that he was treaty resident in the UK under the double tax treaty.
The taxpayer appealed at the UT, which agreed with the FTT’s decision and dismissed the taxpayer’s appeal.
From Tax Update September 2024, published by Evelyn Partners LLP
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
