Trading decision leaves taxpayer hopping madby
The taxpayer was found to have appropriated plots of land within the grounds of her home to trading stock, and so was subject to substantial amounts of income tax on the subsequent sale of those plots.
Bunny Hall is a Grade I listed historic mansion house, located in the village of Bunny, Nottinghamshire. It had been vacant from around 1990 and was in serious disrepair by the time Mrs Whyte purchased the house and estate in 2001.
Whyte would have been aware at the time of purchase that restoration would be costly and the purchase would only have made economic sense with some form of subsidy, such as a grant or an enabling development.
Mrs Whyte and her husband both had experience of construction and property development prior to their involvement in Bunny Hall and the estate.
Mrs Whyte purchased Bunny Hall in her sole name, using funds lent to her by her husband, in order to insulate the purchase from the risk of Mr Whyte becoming insolvent.
In practice, the activities undertaken in relation to the estate were a joint project between husband and wife, and there was an intention to identify and sell building plots as part of an enabling development. This intention existed from the time Mrs Whyte acquired the estate.
Mrs Whyte proceeded to sell serviced building plots to Mr Whyte (trading as TFD). In 2003/4, Mrs Whyte sold four plots to Mr Whyte, and sold a further plot to Mr Whyte in 2005/6. Inspection reports showed that significant construction works had been undertaken to some plots prior to sale.
Mr Whyte (through his business TFD) undertook and funded the renovations to the Hall.
By transferring plots to Mr Whyte, Mrs Whyte gave her husband the opportunity to generate profits from building and selling houses on those plots. These profits were then available to subsidise the costs of renovating the Hall.
A further plot 6 was sold to Mr Bailey in 2005/6 at a discount.
Exemption claimed on sale of building plots
In May 2006 Mrs Whyte filed her 2003/4 tax return and reported the sale of plots 1 to 4 as qualifying for private residence relief (PRR) from CGT.
In January 2007 she filed her 2005/6 tax return, reporting the sale of plots 5 and 6 as also qualifying for PRR.
HMRC opened enquiries into the returns, and issued two closure notices, amending Whyte’s 2003/4 and 2005/6 returns.
The amendments were made on alternative bases:
- That the disposals of the plots were trading transactions and the profit arising from the disposals was trade income liable to income tax and Class 4 NIC; alternatively
- That the disposals of the plots gave rise to chargeable gains liable to capital gains tax and Whyte did not qualify for PRR because:
- alterations were made to the plots prior to disposal; and/or
- most of the plots fell outside of the “permitted area” under TCGA 1992, s 222.
The adjustments were significant, which following HMRC review, still totalled over £600,000 (if additional trading profits) or over £700,000 (if capital gains).
Trading or capital?
One of the core questions that fell to the FTT to answer was whether the disposals of the plots were adventures in the nature of a trade for income tax purposes [TC08215].
The FTT determined that the application of the various badges of trade provided helpful guidance, and carefully considered the badges as they applied in this case.
Although the Bunny Hall estate was acquired by Whyte as a capital asset, the FTT found the construction works in respect of the houses on the plots went beyond the mere sale of land as a capital asset.
Whyte was not merely taking steps to enhance the value of the property in the eyes of a developer who might wish to buy it for development. Rather, the FTT found that she had actually commenced developing it herself.
The FTT determined that as soon as the boundaries of the plots were identified, the plots were appropriated from capital to trading stock. This took place on 8 May 2003, when the plan showing the six plots was submitted to Rushcliffe Borough Council. This gave rise to a disposal at market value for CGT purposes under TCGA 1992, s 161.
Thereafter, Whyte engaged in an adventure in the nature of a trade, and any profits arising on the subsequent disposal of the plots were trade profits liable to income tax.
Application of private residence relief
Another area the FTT had to consider was that of PRR. Could Whyte rely on PRR to relieve all or part of any gain arising on the disposal of the plots when they were appropriated to stock? If the FTT was found to be wrong at appeal, on disposal of the plots to Mr Whyte and Mr Bailey.
The FTT found that, in any event, the disposal of the plots could not benefit from PRR, as the plots did not form part of the permitted area of the Hall.
Sale to third party
Unlike the other plot sales, a further plot was sold to a Mr Bailey, who was presumably known to Mr or Mrs Whyte. The agreed sale price for plot 6 was a below market value of £100,000.
Under ordinary principles, a sale not by way of a bargain at arm’s length would mean that TCGA 1992 s 17 applied to impute market value to the disposal proceeds.
However, in this case, the plots were found to have been appropriated to trading stock. This meant any subsequent profit on the sale of the plot to Mr Bailey was to be computed in accordance with UK GAAP, subject to the deeming of market value under transfer pricing or other statutory provisions (if and to the extent applicable).
The appeal was dismissed.