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Court denies ER to property developer

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In a complex case, the upper tribunal decided that Entrepreneurs’ Relief was not available on the disposal of shares in a property development company because it did not fit the defintion of a trading company.

27th May 2022
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The upper tribunal (UT) covered several complex issues in this appeal by Assem Allam, from procedural matters, business investment relief, to the transactions in securities rules. The UT found that no Entrepreneurs’ Relief (ER) was available on the sale of shares in Allam’s personal company, on the basis that the company undertook, to a substantial extent, non-trading activities.

Assem Allam owned all the issued share capital in Allam Developments Limited (ADL), whose business involved property development and property investment in and around the city of Hull. 

In July 2011, Allam sold the entire share capital of ADL to Allam Marine Limited (AML), a company owned by Allam and his wife, for £4,950,000.

Allam reported a capital gain of £4,925,000 on the disposal of his shares in ADL in his 2011/12 tax return. In addition to making use of capital losses, Allam claimed ER (now business asset disposal relief) on the disposal. 

HMRC opened an enquiry into the return in November 2013. In April 2016, HMRC issued a closure notice, denying the claim on the grounds that ADL was not a trading company. 

Allam appealed to the first tier tribunal (FTT), who dismissed the appeal. Allam thereafter appealed to the UT, with the permission of the FTT.

Non-trading activities

For the purposes of ER, the provisions for which are found in Pt 5, Ch 3 TCGA 1992, there was no dispute that ADL was Allam’s personal company and that Allam was an employee of ADL in the period of one year ending with the date of disposal. This was the qualifying period as the legislation applied at that time – now the period is two years.

Although there was no dispute that ADL carried on trading activities in the form of property development, the main question considered by the FTT was whether the activities of ADL involved, to a substantial extent, non-trading activities. If it did, ER would not be available.

Property investments

Allam spent only one or two hours a week on ADL business, largely dealing with banks on financing matters. Allam’s son, the other director in ADL, spent approximately 20–30% of his working week on ADL business, with 90–95% of that time spent on development matters. 

Broadly, the FTT identified five groups of properties within ADL, comprising:

  1. Melton – factory and offices leased to AML and a third party.
  2. Riverside properties – primarily leased to AML as its main factory and offices. ADL’s directors had intended the site for residential development, but no planning permission was obtained.
  3. Cannon Street – a factory and car parking facility leased back to the vendor. ADL intended to obtain planning permission for residential development and made several unsuccessful applications.
  4. Lime Street Car Park – warehouse buildings were demolished and the site was developed into a pay and display car park that was let out. Buildings on adjacent sites were also demolished.
  5. Other properties – there were a variety of other properties let to tenants, but these were relatively minor and did not affect the FTT’s decision. 

The FTT also looked at ADL’s accounts, noting that the company’s turnover in 2011 was £730,218, which was made up almost entirely of rental income. There were approximately £30,000 of expenses related to the development work on the Lime Street Car Park site and planning applications in relation to other sites.

ADL’s balance sheet at 31 December 2011 showed fixed assets of £8,871,964, predominantly related to the value of the properties. The properties were described as “property investments” in the accounts. The main liabilities in ADL’s accounts were long-term mortgages, amounting to some £4.8m at 31 December 2011. 

FTT decision

The FTT concluded that ADL’s activities were to a substantial extent non-trading activities.

ADL was carrying on some trading activity, or activity in preparation for trading. But the FTT determined that the proportion of ADL’s income that comprised non-trading rental income and the proportion of its asset base devoted to properties that were let simply for their rental income, demonstrated that ADL’s property investment and rental activities had real importance and could not be ignored. 

These activities were not trading activities and they had to be regarded as “substantial” in the context of the activities of ADL as a whole. ER was therefore unavailable.

UT decision

When considering the meaning of the word “substantial” the UT noted that it was necessary to look at the nature of ADL’s activities to measure the extent of those activities, and to consider those activities as a whole.

While the UT accepted that the reference to “activities” in section 165A(3) TCGA 1992 is in the sense of what the company actually does, the question of what ADL actually does had to be looked at in commercial terms. In that sense, while trading could be an activity, so too could be holding an investment property and receiving rents.

Overall, the UT did not detect any error of law or principle in the test applied by the FTT or in its approach. The FTT concluded that ADL was carrying on activities that were, to a substantial extent, not trading activities. 

The UT did not consider that there were any grounds for interfering with the FTT’s conclusion, and agreed with that conclusion. The appeal related to the availability of ER was dismissed.

Modified guidance

Despite HMRC’s guidance at the time that “substantial” in the context of ER claims should be taken to be more than 20%, both the FTT and UT noted that it was not appropriate to apply any sort of numerical threshold. Since the UT decision’s in Allam, HMRC has modified its guidance at CG64090.

Replies (2)

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By Paul Crowley
28th May 2022 18:33

Sounds like the correct decision to me

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By Ian McTernan CTA
30th May 2022 15:54

This case goes to show the importance of separation of trading and non-trading activities if you want your claim to succeed.

It would also have helped if the accounts had described the properties as stock rather than investment properties, plus the nature of the finance would have been taken into account too.

Classic case of trying it on and failing miserably.

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