Taxpayer contests £1m tax bill for renovated propertiesby
A taxpayer faced potential tax and penalties of nearly £1m after HMRC contended that the profits from the sale of three properties he renovated should be classified as trading transactions, while the property owner argued they were capital gains and principal private residence relief should be applied.
In a period of just over five years, Gary Ives bought and sold three properties at substantial gain. HMRC argued that Ives was trading, but the first tier tribunal disagreed, finding not only that Ives was not carrying on a trade, but that private residence relief was available to provide capital gains tax exemption.
Ives bought and sold the following three properties:
- Ringmer Avenue in Fulham (purchased in November 2008 as two flats for £760,000, sold in August 2010 for £1.775m as a single dwelling).
- Wandsworth Bridge Road (purchased in October 2010 for £750,000, sold in January 2012 for £1.5m).
- Crondace Road in Fulham (purchased in July 2012 for £1.731m and sold in December 2013 for £3.25m).
Ives carried out a significant amount of work to all three properties during his period of ownership.
HMRC concluded that the profits derived by Ives from the properties were trading profits subject to income tax, and issued closure notices for 2010/11, 2011/12 and 2013/14, as well as related penalty assessments for deliberate inaccuracies under Schedule 24 Finance Act 2007.
The amount of tax and penalties assessed totalled just under £1m, which Ives appealed (TC08989).
HMRC argued that it was clear from the way Ives conducted himself that these were not ordinary residential property transactions, and that Ives’ intention was to make a short-term profit. HMRC also placed emphasis on the fact that Ives was a “builder” and described himself as such on his tax returns.
Ives, however, argued that the profit from each transaction was a capital gain arising from the disposal of his sole or main residence and was exempt from capital gains tax via principal private residence relief, per section 222 Taxation of Chargeable Gains Act 1992.
In terms of his occupation, Ives explained that he trained as a plasterer, but would take on whatever work he could get, though as a rule these were relatively small-scale projects like kitchen and bathroom refurbishments. He would bring in other tradesmen to help as he needed them.
The first tier tribunal (FTT) found this a very difficult case to decide. On the one hand, the FTT could see why HMRC formed the view that the transactions were trading in nature: there were a series of three transactions, all of which involved the acquisition and disposal of residential property within a short period of time (and in the case of Crondace, there was a large amount of debt finance).
Additionally, substantial work was carried out and the properties were realised at what appeared to be a large profit over acquisition cost. At least superficially, the transactions did resemble a typical property development/trading activity.
However, Ives provided an explanation for each acquisition and disposal:
- Ringmer’s development was to be funded in part by the sale of the Ives’ family home (Fullbrooks). However, Fullbrooks did not sell quickly enough. Following approach from an agent, a buyer made an offer for £1.775m. Ives believed they would have been “silly not to accept it”.
- In the case of the Wandsworth property, it was the “wrong house in the wrong location for a home”, hampered by significant parking and noise issues.
- By the time they purchased Crondace, they found themselves with a home in the wrong place: Mrs Ives no longer needed to be with her mother every day, and their family, who they wished to be close to, had moved to Surrey.
The FTT accepted that Ives was familiar with the workings of the building trade, however it did not go so far as to say that the three property transactions were a natural extension of his ordinary business.
Standing back and looking at things in the round, the FTT could see factors which pointed towards trading. However, all those factors could be explained by Ives’ narrative: he was trying to establish a family home to hold for the long term, but forces of circumstance threw those plans off course.
On the balance of probabilities (that is to say, it was more likely than not) the FTT concluded that the properties were not purchased with a view to disposal at a profit in short order (after significant work had been carried out), but they were each purchased to be a family home for the Ives family and realised when circumstances changed.
As a result, the transactions were not trading in nature.
Private residence relief available
In the alternative, HMRC argued that Ives had derived capital gains from the three property transactions which were subject to CGT, with no private residence relief available.
Per Ives’ evidence (which HMRC did not challenge), which was supported by numerous witness statements provided by friends and family, Ives moved into each property as it was acquired (albeit in some cases with very limited amenities), with his wife and other family members following as soon as possible.
However, there were some inconsistencies in Ives’ evidence, with council tax exemptions having been claimed for the properties on the basis they were unoccupied and unfurnished (Ives argued that he believed such exemptions could be claimed where a property required a significant amount of work).
The FTT noted that it was not in point for it to consider whether the council tax exemptions were properly made, but whether Ives was actually in occupation of the properties.
Applying the test of residence, the FTT found that all three properties were actively occupied by Ives as his residence. At least once the significant work had been completed, the properties were furnished and enjoyed socially in the way one would expect an ordinary family home to be occupied. Ives intended that occupation to be permanent. Although it transpired that such occupation was relatively short term, that was due to the way his family circumstances changed.
Private residence relief was available in relation to the gains.
This appeal also considered assessments and penalty determinations in relation to rental income. The FTT found partly in favour of HMRC on this matter, however the amounts at stake (a few thousand pounds) were much less significant.