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Planning applications fail ER trading threshold

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Taxpayers’ claims for entrepreneurs’ relief on the disposal of company shares were denied because the company was not deemed to be trading.

30th Apr 2024
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The first tier tribunal (FTT) has denied taxpayers’ claims for entrepreneurs’ relief (ER) on the disposal of company shares, finding that the activities of the company did not amount to a trade.

In 2011, Stolkin Greenford Limited (SGL) acquired a substantial parcel of land in West London, which was recorded as the (only) fixed capital asset of SGL’s investment business. At the time of acquisition, the land was subject to significant planning restrictions.

In April 2013, the London Borough of Ealing issued a development strategy document, which identified the site as a special opportunity site to provide high-density, mixed-use development, including offices, housing, leisure and community uses.

Following SGL’s submission of a hybrid planning application for the development of up to 593 dwellings, including converting and expanding parts of the site to include leisure, retail and community use, SGL appropriated the site to trading stock in its accounts in December 2013.

In December 2015, the site was sold to Greystar (a major US private rented schemes operator). Shortly thereafter, in March 2016, SGL went into members’ voluntary liquidation and each of the taxpayers (who were directors and shareholders in SGL) received distributions in respect of their shares in the company.

Entrepreneurs’ relief claims denied

The taxpayers each claimed ER (now business asset disposal relief) in relation to their disposal of shares in SGL in their 2015/16 tax returns.

HMRC denied the ER claims, arguing that the capital gains tax relief was not available in respect of their disposal of SGL shares. Each of the taxpayers appealed [TC09086].

Was there a trade?

In this appeal, the FTT had to determine whether condition B in section 169I TCGA 1992 was satisfied. Specifically, whether SGL was a trading company for the relevant period. If yes, then the relevant conditions were met for ER to be available.

HMRC’s position was that SGL was never a trading company. 

The taxpayers, however, argued that SGL began to carry on a trade in December 2013, when SGL changed its plans as to how it intended to maximise value from the site. Rather than develop the site and hold it as a long-term investment, SGL began to seek major planning consents for change of the site’s use, with a view to its onward sale.

Common ground

It was common ground that an asset that is purchased as an investment can be appropriated to be held as trading stock and vice versa, and the FTT found that SGL had been correct to classify the site as a fixed capital asset at the time of acquisition.

However, in terms of SGL appropriating the site to trading stock in 2013 for accounting purposes, the FTT noted that such appropriation could not have any tax significance unless SGL was carrying on a trade.

In its decision, the FTT considered the badges of trade in some detail and commented that, in deciding whether a person is trading, it was not enough to ask whether a person is looking to make a profit from a transaction, but rather to also ask how that person is looking to make a profit.

In the case of SGL, the FTT found that, ultimately, SGL had changed its plans once the London Borough of Ealing began (of its own volition) to loosen the planning restrictions around the site, with SGL then working towards securing ever more favourable planning permission before selling the site. 

While the effort involved in securing a better planning position for the site would have incurred costs in terms of external advisers’ and directors’ time, the FTT did not consider that SGL’s actions amounted to anything more than taking advantage of a fortuitous turn of events by putting its single fixed asset into the best position for onward sale. Further, SGL would not have carried out a development or have done anything that would have made a significant change to the site.

The appeal was dismissed.

Trading activities

Section 165A(4)(b) TCGA 1992 provides that trading activities include activities a company is carrying on for the purposes of a trade that it is preparing to carry on.

The FTT considered whether SGL was, in the alternative, preparing to trade. However, the tribunal found no qualitative difference between what SGL was doing and anything it had planned to do in the future, which could lead to the conclusion that its activities were for the purposes of a trade it was preparing to (but had not yet started to) carry on. Given the finding that SGL was not carrying on a trade, the FTT found that neither was it preparing to carry one on.

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