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A row of houses in Fulham| Taxpayer contests £1m tax bill after property renovations | AccountingWEB
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Taxpayer contests £1m tax bill for renovated properties

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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.

12th Jan 2024
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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).

Arguments

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.

No trade

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.

Replies (29)

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By FactChecker
12th Jan 2024 12:59

A very lucky fella ... I trust that Gary Ives went on to buy a lottery ticket?

Thanks (9)
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By Justin Bryant
12th Jan 2024 13:28

This is probably the only good and reasonably safe way to make large, low economic risk tax-free profits in the UK. Good for him.

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Replying to Justin Bryant:
By Nick Graves
15th Jan 2024 12:10

Have to agree with that.

However, it's not easy living on a building site - especially for the family.

So the (impressive) gains are largely hard-earned.

Kudos to the guy.

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By JCresswellTax
12th Jan 2024 13:56

Great case, very interesting and he has done well to win it!

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Replying to JCresswellTax:
By Ruddles
12th Jan 2024 18:57

Assuming that HMRC have not opted to appeal.

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Replying to Ruddles:
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By Justin Bryant
15th Jan 2024 10:32

You cannot appeal by simply opting to appeal. You need permission to do that (I'd be surprised if they get that).

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Replying to Justin Bryant:
By Ruddles
15th Jan 2024 11:16

No sh*t.

Most intelligent people would understand what I meant, but for the hard of understanding let me correct myself - "Assuming that HMRC have not opted to apply for permission to appeal"

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Replying to Ruddles:
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By Justin Bryant
15th Jan 2024 12:49

You're welcome. Happy to educate you here. Please tell us all why you think they'll get permission to appeal. What error of law or Edwards v Bairstow point is challengeable here? (I can't see any.)

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Replying to Justin Bryant:
By Ruddles
15th Jan 2024 13:36

Justin Bryant wrote:

Please tell us all why you think they'll get permission to appeal.

Please tell us all where I said that

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Replying to Ruddles:
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By Justin Bryant
15th Jan 2024 14:32

Assuming you mean that like me you don't think that's likely to be granted, I think most people would agree it would have been much better to make that point clear in your 1st comment above (like JTL below) or simply not make any such comment at all.

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By ireallyshouldknowthisbut
12th Jan 2024 15:45

Proving intention is never easy.

Its always horrible advising in this area after the event, I have done more than one which amounted to

"you've gotta ask yourself a question: "Do I feel lucky?" Well, do ya, punk?

Phrased somewhat more professionally of course.

Thanks (5)
Replying to ireallyshouldknowthisbut:
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By johnjenkins
15th Jan 2024 09:21

Well at least it's not a "cluster f..."

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By JS23
15th Jan 2024 09:26

Wow, this guy is a legend..

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By richards1
15th Jan 2024 09:27

However this is why this relief should be time limited ie you need to hold the asset for a minimum period of say 5 years.
Its a loophole that, as we all know, builders (and politicians) exploit.

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Replying to richards1:
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By unclejoe
15th Jan 2024 10:24

That would be very unfair on families that need to move because of an unexpected change in circumstance. An accountant, say, who moves location to take up a new job and that job does not work out. Taxman is already getting a slug of tax in SDLT on the property transactions. Government might get around this by making rules more complicated but tax rules are already complicated enough and it just leads to inefficient waste of resources in arguments like this one. With any tax rules there will always be "loopholes" - we just have to live with it.

Thanks (9)
David Ross
By davidross
15th Jan 2024 09:58

When I was a TO(HG) a friend asked how long a property had to be owned to enjoy PPR. So I went across the corridor and asked friendly Mr Loosemoor, an Inspector.

His answer was as little as one day - perhaps you discovered when you moved in that there was a pig farm next door!

We had clients who discovered that just down a slope past the trees by their idyllic new nome was the bus garage. Since Bournemouth Transport abolished the trolley buses in 1967, 5AM was a cacophony of diesel engine start ups.

Happily, soon after, the garage became a retail park and they stayed ...

No a bad idea, when buying, to see if there might be. plausible escape route. Just saying !

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By 2TunTed
15th Jan 2024 10:00

On the basis that the FTT have correctly interpreted the law and properly assessed the tax payers intentions, HMRC will not appeal but will get the law changed. If this tax payer isn't 'trading', what is he doing?
Not a bad 'side hustle', though and everyone's at it. If its OK for the government to rob your pension funds why not tax gains in PPR's? 10% for the plebs and 20% for the property professionals

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Replying to 2TunTed:
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By Justin Bryant
15th Jan 2024 10:34

PPR relief is far too politically sensitive for HMRC to just simply opt to do that!

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By Twickers Call
15th Jan 2024 10:54

It is not normal for anyone to move several times within a short period of time. Then again Ives has not done anything wrong,illegal or improper. One would be concerned,if there were more similar transactions prior to the three transactions took place from 2008. Frequency of such transactions might point the finger towards the correct direction. Just three transactions may not be sufficient for the Revenue judgement. Interesting to see the final result.

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Replying to Twickers Call:
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By Friendly Bookkeeper
15th Jan 2024 12:35

Twickers Call wrote:

It is not normal for anyone to move several times within a short period of time. Then again Ives has not done anything wrong,illegal or improper. One would be concerned,if there were more similar transactions prior to the three transactions took place from 2008. Frequency of such transactions might point the finger towards the correct direction. Just three transactions may not be sufficient for the Revenue judgement. Interesting to see the final result.

It isn't usual ... but that doesn't make it abnormal. What seems 'normal' to you (or to a government inspector) may seem very odd to someone else.

If we are going to apply the law according to what is considered 'normal' then a lot of people are going to be in a lot of trouble !!

Thanks (1)
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By Ian McTernan CTA
15th Jan 2024 10:55

I think the FTT (and HMRC before that) should have looked at when the properties were marketed, rather than date of sale, including correspondence with the mortgage broker and also looking more closely at the council tax claims. Fixed rate or variable? Development finance?

The Wandsworth excuse is particularly flimsy...'wrong house in wrong location' would have been obvious straight away, why spend money developing it before selling?

It takes quite a while to sell a property, and the excuses in this case aren't strong but the profits clearly are!

Bad decision in my opinion (great for the taxpayer, not great for clarity for clients in future and likely to lead to more such claims from builders!), I wonder if HMRC will appeal. Although they might not have got the right evidence in the first place to make a decent case....

The rules need changing in this area: my worry is HMRC don't make a good job of it and we end up with a worse set of rules than we have now.

Thanks (6)
Replying to Ian McTernan CTA:
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By wamstax
15th Jan 2024 13:30

Hi Ian
Since I started to defend clients on the good side in 2006 I have had two cases where HMRC challenges were defeated by a close analysis of all the facts (from purchasing, through mortgages, through occupation , through council tax, through planning, through advertisingand through use of the sale proceeds etc etc. I have had two successful cases that I can recall that led to frequent house changes for unforeseen problems or change in family circumstances or change in intentions so while it may be unusual it is certainly the fact that these things can and do happen which with a proper interpretation of the facts and legislation can lead to a favourable outcome for the taxpayer.
Do accept that there are a few things that HMRC could have followed up (including finance applications and correspondence and advertising that might have given an outcome favourable to HMRC. After all if you advertise the property for sale before (or around the time that you and the family take up residence it is certainly not the intention to occupy the property with the necessary quality of occupation and permanence that in my view would be necessary to sustain a PPR claim.
A very lucky guy I think and hopefully HMRC investigators might use that case as a starting point for looking at PPR cases with multiple transactions and the avenues for consideration that were clearly missed.

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Replying to wamstax:
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By johnjenkins
15th Jan 2024 13:45

Have you ever thought that the guy might be telling the truth in which case it is the correct outcome.

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By Jack the Lad
15th Jan 2024 13:22

I usually advised clients in the same position as Mr Ives, that he should live in the property for at least 6 months in order to qualify for PPR relief. That was certainly the length of time that most HMRC Inspectors were happy with, to accept main residence rather than trading.

Good on him and his advisers for taking this case to the FTT. I cannot see what grounds HMRC would have to apply for permission to appeal.

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By Twickers Call
15th Jan 2024 14:40

Buying stock and shares and selling them again often at a profit was considered trading.
How unfair it would be if Revenue decided to challenge?

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Replying to Twickers Call:
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By johnjenkins
15th Jan 2024 15:00

Surely renting properties out is a trade. Not according to HMRC.

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By Husbandofstinky
15th Jan 2024 14:57

All of this happened ten years ago.

Not really relevant, but it would be interesting to see the movements both before and after the period in question rather than these three properties in isolation. Perhaps there were none or perhaps HMRC didn't pick up on it.

Either way Mr Ives was rather fortunate in this minefield.

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By john corbett
16th Jan 2024 01:14

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.
HMRC could and should have looked at this area in more detail. The properties are all close and while Ives may or may not have moved into them there was no reason for this and he would have been spending time at the family home with his wife and kids. Did he actually change his address for bank accounts, drivers license , doctor, tax returns, electoral register. Do you actually leave your wife and kids to live on a building site within daily traveling time. We will never know as HMRC did nor challenge.

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Replying to john corbett:
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By johnjenkins
16th Jan 2024 08:49

I think a part of the problem is that if you have a mind set to have a beautiful family home and you don't have the money to buy it outright then I see no reason to put up with a few inconveniences for a few years. The "normal" person would just wait many years of exchanging up to achieve this. HMRC certainly don't like you using the "rules" to your advantage rather than theirs.

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