Thanks for your detailed reponse. In respect of your last point my client is (or was!) a housebuilder, hence the similarities with the Farnsworth case. The company bought the land and built the houses from scratch. The earlier ones (6, I think) were sold - the last 4 retained. The build was funded from previous retained profits. This was effectively a small housing development. Before this development there were others - both individual houses, I believe, and other small housing estates. So the motive for acquisition was to buy, build and sell and this is evidenced by what happened previously. Did they just keep the last four as an investment? Maybe ... but this is not what I've been told.
They were not in the business of buying houses and renting them out (although there is one property that was bought as an invetsment in 2011, which muddies the waters) or indeed buying them, rennovating and selling.
That sounds really straight forward - but it isn't is it.
This is from Property Tax Planning 9th Edition (although I picked it up from accounting web) before asking the question:
"When a property has been acquired as trading stock, this classification will probably not be disturbed unless there is a formal decision by the properietors/ directors to change its status at any particular time.
The courts appear reluctant to accept that a property acquired as trading stock has ceased to be trading stock merely because it has been let for a number of years rather than be sold."
The cases cited ar Oliver v Farnsowrth, Speck v Morton, Taylor v Good, Simmons v IRC.
Thanks for your comments. As per the question , they built the four houses concerned. The company was an active property developer and had previously sold the houses it had previously built.
Not everywhere - in the area these houses are located the prices have been flat as far as I can tell between 2013 and 2020, although some increases over the last year. But that should be fairly easy to back up with evidence. But assuming that this is the case, is this sufficient for the company to be regarded as a trading company?
No they haven't. It's not the fact that they could't sell them but rather decided not to because they weren't going to get the profit they originally thought they would. In Oliver v Farnsworth a property built in 1929 was let to several tennants and sold in 1953 and HMRC argued successfully that the properties were trading stock. I would be applying the same argument here. Nothing I have read indicates that the business in that case was trying to sell the properties for 24 years.
The parents owns the share capital in the company and wish to pass the shares to the (grown up) children and jointly claim hold over relief with the children . My understanding is that if the company is not predominenetly trading then they will not be able to claim hold over relief or alternatively Business Asset Disposal Relief.
So the question is whether this would be regarded as a trading company. The company has a history of trading and holds 4 properties in stock, although they've been rented out since they were built due to poor market conditions (they also have one investment property).
The case of Oliver v Farnsworth supports their view that the properties should continue to be treated as trading stock. However, the activities of the company since 2011 have just been to rent those properties - and the one investment property - out. There have been no other significant activities.
So my question is regarding the company's status as this will presumably determine whether they can claim hold over relief.
Thank you - considering varying the Will and passing straight to the children. No guarante that BPR is available so valuation useful for tax planning (and CGT in future).
Thank you. I think i'm missing something here though. Can't the Partnership just transfer the trade into the company in exchange for a directors loan account balance and leave the premises and the associated land outside of the company. Then land would then be sold to the third party and ER claimed under the associated disposal rules?
My answers
Thanks for your detailed reponse. In respect of your last point my client is (or was!) a housebuilder, hence the similarities with the Farnsworth case. The company bought the land and built the houses from scratch. The earlier ones (6, I think) were sold - the last 4 retained. The build was funded from previous retained profits. This was effectively a small housing development. Before this development there were others - both individual houses, I believe, and other small housing estates. So the motive for acquisition was to buy, build and sell and this is evidenced by what happened previously. Did they just keep the last four as an investment? Maybe ... but this is not what I've been told.
They were not in the business of buying houses and renting them out (although there is one property that was bought as an invetsment in 2011, which muddies the waters) or indeed buying them, rennovating and selling.
That sounds really straight forward - but it isn't is it.
This is from Property Tax Planning 9th Edition (although I picked it up from accounting web) before asking the question:
"When a property has been acquired as trading stock, this classification will probably not be disturbed unless there is a formal decision by the properietors/ directors to change its status at any particular time.
The courts appear reluctant to accept that a property acquired as trading stock has ceased to be trading stock merely because it has been let for a number of years rather than be sold."
The cases cited ar Oliver v Farnsowrth, Speck v Morton, Taylor v Good, Simmons v IRC.
Thanks for your comments. As per the question , they built the four houses concerned. The company was an active property developer and had previously sold the houses it had previously built.
Not everywhere - in the area these houses are located the prices have been flat as far as I can tell between 2013 and 2020, although some increases over the last year. But that should be fairly easy to back up with evidence. But assuming that this is the case, is this sufficient for the company to be regarded as a trading company?
No they haven't. It's not the fact that they could't sell them but rather decided not to because they weren't going to get the profit they originally thought they would. In Oliver v Farnsworth a property built in 1929 was let to several tennants and sold in 1953 and HMRC argued successfully that the properties were trading stock. I would be applying the same argument here. Nothing I have read indicates that the business in that case was trying to sell the properties for 24 years.
I'm sorry if the question wasn't clear.
The parents owns the share capital in the company and wish to pass the shares to the (grown up) children and jointly claim hold over relief with the children . My understanding is that if the company is not predominenetly trading then they will not be able to claim hold over relief or alternatively Business Asset Disposal Relief.
So the question is whether this would be regarded as a trading company. The company has a history of trading and holds 4 properties in stock, although they've been rented out since they were built due to poor market conditions (they also have one investment property).
The case of Oliver v Farnsworth supports their view that the properties should continue to be treated as trading stock. However, the activities of the company since 2011 have just been to rent those properties - and the one investment property - out. There have been no other significant activities.
So my question is regarding the company's status as this will presumably determine whether they can claim hold over relief.
Thanks.
Thank you - considering varying the Will and passing straight to the children. No guarante that BPR is available so valuation useful for tax planning (and CGT in future).
Thanks all. That was my conclusion to but as they say you don't know what you don't know so I thought I'd double check.
Thanks for your reply - "They are in the process of selling land to the side of the premises to a developer...."
Thank you. I think i'm missing something here though. Can't the Partnership just transfer the trade into the company in exchange for a directors loan account balance and leave the premises and the associated land outside of the company. Then land would then be sold to the third party and ER claimed under the associated disposal rules?