CGT due on transfer to relative’s company
A single property was moved between individuals and companies – all controlled by one family which created an undeclared Capital Gains Tax (CGT) liability and penalties for careless error.
A shop premise in the High Street in Plaistow with flats above was jointly owned by brothers Asif Bhikhi and Sajid Bhikhi.
In 2006, Asif was convicted of a crime and a confiscation order was imposed against Asif and Sajid for £212,861 each. The brothers were unable to raise a mortgage over the property to obtain funds to pay off the debt. As a result, the property was transferred to a relative’s company; MIS Business Solutions Limited (MIS Ltd), so that a mortgage could be raised.
Although the property was subject to restraint orders granted in 2008, the High Court granted two variations to the restraint orders in May 2012 to allow the sale of the property to MIS Ltd.
The conveyancing agreement was dated 30 May 2012 and the sale completed on 31 May 2012. Land Registry form TR1 reported a transfer of the property on 31 May 2012 for consideration of £499,000. The section for ‘declaration of trust’ under Box 10 of Form TR1 was left blank.
However, at the first tier tribunal (FTT) [TC07728], Asif Bhikhi claimed the property was held on trust and not subject to CGT on its transfer to MIS Ltd.
In April 2018 Bhikhi Property Limited (BPL), a company wholly owned by a third brother, Maksud Bhikhi, purchased the property from MIS Ltd for £499,000.
Reporting of rental income
Asif stopped reporting the receipt of rents from the property on his tax returns with effect from 31 May 2012. However, Asif and Sajid continued to manage the property, and when the rents collected from the property were insufficient for MIS Ltd to make its mortgage payments, Asif and Sajid made up the shortfall. Additionally, in 2016 the two brothers paid for two more flats to be built on top of the property.
MIS Ltd included the cost of the property on its balance sheet as an asset of the company, claimed the mortgage interest and reported the rental income from the property. MIS Ltd also reported a capital loss on the sale of the property to BPL in 2018.
In June 2016, HMRC found that Asif had made a disposal for CGT purposes and as the sale had been to a connected party, a market valuation of that disposal was needed for the CGT computation.
In March 2017, HMRC issued a discovery assessment for CGT of £43,855. In May 2018, it issued a penalty assessment for £6,578.25 for a careless inaccuracy in Asif’s return.
Asif appealed, arguing that the transfer of the property to MIS Ltd was not a capital disposal but a transfer to a family member on trust, and that the brothers retained beneficial ownership of the property after the transfer.
Was there a disposal?
The FTT found that under English law there had been a disposition of property in May 2012, pointing to the conveyancing agreement, the transfer of legal title by deed on Form TR1, as well as the existence of a 2012 variation order that permitted a sale of the property under certain conditions.
Consequently, there had been a disposal under s1(1) TCGA 1992.
Was MIS a bare trustee?
A line of argument advanced that MIS Ltd held the property in the capacity of a bare trustee for the wider 39 members of the Bhikhi family, with whom the beneficial ownership continued to reside despite the transfer in 2012. Under this argument, s 60 TCGA 1992 applied to remove any gains arising from being chargeable.
The FTT dismissed this argument, making the point that a bare trust of land “cannot simply be willed into existence in the absence of a valid legal instrument to declare such a trust.” The FTT noted there was no legal document to evidence the appointment of MIS Ltd as a bare trustee in compliance with the Trustee Act 2000, and that the section for ‘declaration of trust’ on Form TR1 was completely blank.
No implied trust
The FTT went on to consider whether there had been an implied trust (whether constructive or resulting) as a question of law, and if so whether that could have affected the chargeability of the gains arising on the property transfer in 2012.
A constructive trust would not have assisted the taxpayer’s appeal. The FTT found that if there had been a constructive trust, the property would have become ‘settled property’ within the meaning of s68 TCGA 1992, meaning there would have been a transfer for CGT purposes in accordance with s70 TCGA 1992.
As to the resulting trust analysis, the argument for an implied trust would have been on the basis that the beneficial interest of the property resided with the extended family and that it was the decision of the wider family to advance the property as the security for MIS Ltd to raise funds to pay the Crown Prosecution Service orders.
However, the FTT also dismissed this line of argument. The 2012 conveyancing agreement affected the disposition of the beneficial interest in the property. Even if the wider family was supposed to have equitable interests in the property, the process of conveyance in a contract of sale enabled the purchaser to overreach these equitable interests held on an implied trust.
Ultimately, the FTT found that the 2012 variation order and conveyancing agreement, alongside Form TR1, were legal documents that stood as irrefutable evidence that the property was sold in 2012. As a result, the transfer of the property by the taxpayer to MIS Ltd was a disposal for CGT purposes.
HMRC’s discovery assessment was upheld in full, as was the penalty assessment. The appeal was dismissed.
While the logic behind the taxpayer’s appeal is understandable, the FTT had to consider what had legally occurred. In this instance that the transfer of the property constituted a disposal, and the CGT was due.