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CGT: Quick flipping was not trading

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The first tier tribunal denied private residence relief on gains of £260,000 made from four properties in five years, but did not agree with HMRC that the taxpayer was trading as a property developer.

1st Jun 2022
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Between December 2010 and March 2016, Mark Campbell bought and sold four residential properties, generating gains of around £260,000. The longest period of ownership amounted to two years and four months. The shortest period was around nine months.

In August 2017, HMRC wrote to Campbell asking him to submit a 2015–16 tax return, as HMRC had information that Campbell had disposed of a property other than his main home (8 Wigshaw Lane).

Campbell lodged his 2015–16 return and claimed private residence relief on the disposal, arguing that the gain was exempt as he was living in job-related accommodation (JRA), and intended to occupy Wigshaw Lane as his main residence throughout his period of ownership.

HMRC disagreed that Campbell was living in JRA and opened an enquiry into the 2015–16 return. Following further exchanges of correspondence and requests for information, HMRC issued a closure notice under section 28A TMA 1970 for 2015–16, and discovery assessments under section 29 TMA 1970 for 2012–13 and 2014–15. HMRC also issued penalties under Schedule 41 FA 2008 for failure to notify liability to tax.

Campbell appealed [TC08398], with the appeal decided as a default paper case at the first tier tribunal (FTT).

Was there a trade?

The first issue the FTT considered was whether the sales of the four properties were trading transactions.

HMRC argued that the properties Campbell purchased were redeveloped and then sold at profit, an activity that bore the hallmarks of trading. The repeated nature of the activity also suggested a profit-generating motive.

Campbell, on the other hand, argued that he was not a trader and that the properties were purchased with the intention that he would reside in them (although for various reasons, he did not).

The FTT found that Campbell had been very active on the property market over a relatively short period of time, had relatively short periods of ownership for all but one of the properties, and did modify the properties in order for them to be sold, and that this generated a profit.

However, this did not result in a conclusion of trading. While the FTT acknowledged that a single badge of trade can be sufficient to show trading, the FTT ultimately found that Campbell was not a professional property developer and was not carrying on a trade. His activities had no connection with an existing trade, and there was no evidence to support a finding that Campbell had engaged in a similar activity over a protracted period of time.

Job-related accommodation

As there was no trade, the CGT provisions were in scope of the gains made on sale of the properties.

The FTT proceeded to consider whether Campbell was living in JRA.

Campbell argued that section 222(8) TCGA 1992 should apply to the gains arising on two of the properties, on the basis that he intended to reside in these properties, but had to reside in JRA. Section 222(8) TCGA 1992 does not require actual occupancy for Private Residence Relief (PRR) purposes if there is an intention to occupy.

The JRA in question was his family home, which he lived in to care for his sick father, who was diagnosed with front lobal dementia.

The FTT did not accept that Campbell lived in JRA. Reference was given to Campbell’s own written evidence, in which he considered his residence at his parents’ property to be residing “at home”, that is the accommodation was not provided for the purposes of employment, but rather was a family arrangement.

No relief available

Even though the FTT found Campbell was not living in JRA, there was still the question of whether PRR under section 222 TCGA 1992 was available for any of the properties.

The FTT found that, overall, Campbell did not intend for any of the properties to become his main residence. There was no degree of permanence, continuity or expectation of continuity for any property.

Aside from an overall lack of documentary evidence to support a PRR claim, such as utility bills or changes of correspondence address, council tax records for all properties were classed as long-term empty. The exception was 28 Bramshill Close, which was occupied for around nine months.

However, the FTT found that Campbell had spent time in 28 Bramshill Close because he could not get the property off the market. As Campbell had already placed the property on the market prior to moving in, his occupation of 28 Bramshill Close was more akin to a stopgap.

Consequently, no PRR was available for any of the properties.

The appeal was dismissed.

Comment

In this case, no relief was available under section 222 TCGA 1992. However, it is worth mentioning (and was an argument advanced by HMRC) that any relief available under section 222 TCGA 1992 is subject to section 224(3) TCGA 1992, which can prevent relief where the purpose of the acquisition was to realise a gain, or can limit relief where expenditure is incurred for the purposes of realising a gain.

Replies (9)

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the sea otter
By memyself-eye
02nd Jun 2022 15:49

Interesting - I wonder what that cost him in tax, interest and penalties

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Replying to memyself-eye:
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By Hugo Fair
02nd Jun 2022 17:04

No JRA and no PRR, so CGT on the full gain = a sizeable arm & a leg (presumably with interest & penalties sufficient to add to the pain after those amputations).

The 'interesting' bit to me is how the FTT came to their conclusion of 'no trade' when it sounds exactly like my definition of trade (intentions and outcomes)?

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By fawltybasil2575
02nd Jun 2022 19:25

@ Lucy.

Thank you for your article.

One has to wonder whether the taxpayer considers the outcome a favourable one, given the “middle ground” decision (there is probably insufficient information, in the decision, to enable one to determine whether the outcome is “the right side of that EXACT middle“).

The following paragraph (in your article) is interesting:-

“However, this did not result in a conclusion of trading. While the FTT acknowledged that a single badge of trade can be sufficient to show trading, the FTT ultimately found that Campbell was not a professional property developer and was not carrying on a trade. His activities had no connection with an existing trade, and there was no evidence to support a finding that Campbell had engaged in a similar activity over a protracted period of time”.

I note especially these three factors:-

“ . . was NOT a PROFESSIONAL developer”.

“. . activities had NO connection with an EXISTING TRADE”.

". . NO evidence . . . “ that the taxpayer “ . . had engaged in a similar activity over a PROTRACTED PERIOD of time”.

[The CAPITALS are mine, of course].

Albeit only an FTT case, these three separate factors should be “stored” for future reference (albeit there will be other cases citing these same three factors) in case one has a client encountering an HMRC claim that a trade exists, where one believes to the contrary (regardless of course of whether there is any PPR factor at issue also).

Basil.

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Replying to fawltybasil2575:
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By gillybean04
03rd Jun 2022 13:53

You may want to view the judgement basil, I believe factor 2 and 3 is what caused the tribunal to accept he wasn't a professional property developer (and as such, was not trading). Not that him not being a professional was a factor in whether it amounted to a trade.

If I may, doesn't professional just mean of that profession, and isn't profession another word for trade? So in saying he was not a professional, they were merely saying he was not carrying out the trade of developing properties? Does being bad at a trade, prevent you from carrying out that trade or being a professional of that trade?

www.casemine.com/judgement/uk/623236aeb50db9fc0c9262e5/amp

The reoccurring theme in the judgement seems to be inconsistencies in the claims or statements made by Mr Campbell.

Such as the claim for JRA being based on his father needing round the clock care that was provided by Mr Campbell (and therefore required him to live with his parents, in JRA), but as this supposed employment started in 2010, it was at odds with his claim of purchasing homes between December 2010 and June 2015 with the intent to live in them. Or why breaking up with his girlfriend meant he needed to sell a property, when there was no evidence she ever held an interest in the property.

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Replying to fawltybasil2575:
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By gillybean04
03rd Jun 2022 17:20

I posted this earlier, but it seems to have not gone through.

You may want to view the judgement basil, I believe factor 2 and 3 is what caused the tribunal to accept he wasn't a professional property developer (and as such, was not trading). Not that him not being a professional was a factor in whether it amounted to a trade.

If I may, doesn't professional just mean of that profession, and isn't profession another word for trade? So in saying he was not a professional, they were merely saying he was not carrying out the trade of developing properties? Does being bad at a trade, prevent you from carrying out that trade or being a professional of that trade?

www.casemine.com/judgement/uk/623236aeb50db9fc0c9262e5/amp

The reoccurring theme in the judgement seems to be inconsistencies in the claims or statements made by Mr Campbell.

Such as the claim for JRA being based on his father needing round the clock care that was provided by Mr Campbell (and therefore required him to live with his parents, in JRA), but as this supposed employment started in 2010, it was at odds with his claim of purchasing homes between December 2010 and June 2015 with the intent to live in them. Or why breaking up with his girlfriend meant he needed to sell a property, when there was no evidence she ever held an interest in the property.

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By fawltybasil2575
03rd Jun 2022 19:53

@ gillybean04.

May I address your sentence:-

“So in saying he was not a professional, they were merely saying he was not carrying out the trade of developing properties?”.

If I understand you correctly, I must respectfully disagree that comment.

If I interpret your comment correctly, you consider that “factor 1” does no more than establish that the taxpayer’s carrying out a small number of property transactions (in relation to the transactions which are at the core of the appeals) was ITSELF not a “profession”. With full respect, that is not unfortunately how I interpret that factor in Lucy’s article.

I believe that paras 15 and 92 of the judgment are in point, in advising that the taxpayer was (as his “profession” in life) not a property developer but a “full-time carer” – the judgment says that he was such carer from early 2010, for his father (whether he was a carer for his father prior to 2010, or indeed a carer for other persons prior to that year, I cannot readily see from the judgment, albeit of course the full written submissions to the FTT may have referred to that point).

As a general comment, of course, I recall that (in other cases) an important factor has been the NORMAL “profession” of the taxpayer, such that being a property developer/builder can (albeit of course not necessarily so) result a decision of “trading” being more likely than if the taxpayer is unconnected with property development/building.

I entirely agree your comments (last two paragraphs of your post) re the unreliability of the appellant’s submissions.

Basil.

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Replying to fawltybasil2575:
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By gillybean04
03rd Jun 2022 23:55

Basil, at para 77 it was said:

"77. Whilst a single badge of trade is sufficient to show trading, I find that in the appeal before me, the Appellant's activities had no connection with an existing trade. There is no evidence before me to support a finding that the Appellant had engaged in a similar activity over a protracted period of time. In reaching these findings, I have considered all of the arguments, together with the documentary evidence included in the bundle. I accept that the Appellant is not a professional property developer."

So, to me at least, it reads as not being a professional developer was not a factor, it was the outcome.

In that, had it been connected to an existing trade, or had there been similar activity over a protracted period (which could have pointed to a new trade) he could have been found to be a professional property developer.

I wonder if he'll appeal.

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Replying to fawltybasil2575:
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By gillybean04
03rd Jun 2022 23:56

Duplicate

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