Capital gains tax – Sale of property – Taxation of Chargeable Gains Act 1992 – Property divided into flats let to tenants – Appellant selling property to company in return for shares in company – Respondents assessing appellant to capital gains tax – Whether transaction amounting to sale of business as going concern so as to attract roll-over relief from capital gains tax under section 162 of 1992 Act – Whether activities of appellant sufficient to amount to business where referable to ordinary management of investment property – Appeal allowed
The appellant and her husband owned a large building in Belfast that was divided into flats, five of which were let to tenants. After taking over the management of the property in 2002, the appellant and her husband devoted approximately 20 hours per week to the task, dealing with tenants, cleaning communal areas and empty flats, doing the gardening and carrying out repairs, maintenance and improvements. They also instructed surveyors to prepare plans for refurbishing and redeveloping the property and obtained planning permission for extensions and other alterations to the property. Neither the appellant nor her husband had any other occupation during the relevant period.
In September 2004, the appellant and her husband transferred the entire property to a company in exchange for shares in that company. In August 2005, they made a gift of those shares to their son, who became the sole shareholder and director of the company.
The respondents assessed the appellant to capital gains tax for the tax year 2004 to 2005 in the sum of £19,538.77 in respect of her gains on the sale of the property. On appeal from that decision, the appellant contended that the transaction was a sale of a business by an individual to a company in return for shares in that company, so as to attract roll-over relief from tax under section 162 of the Taxation of Chargeable Gains Act 1992.
Rejecting that submission, the first-tier tribunal (FTT) held that the appellant’s activities in relation to the property were not sufficient to amount to a business since they did not go over and above those that would be required or expected as incidental to the ordinary maintenance, repair and development of an investment property. In reaching that conclusion, it considered the relevant distinction to be that drawn in section 15 of the Income and Corporation Taxes Act 1988 between income from property under Schedule A and income from a trade or business assessable under Schedule D. It found that the scale of the appellant’s activities was simply commensurate with the size of the property and the number of occupied apartments and that the size of the building did not, of itself, convert the ownership of the property into a business.
Held: The appeal was allowed.
The distinction drawn in section 15 of the 1988 Act between a trade taxable under Schedule D and property income taxable under Schedule was not material to the construction of the word “business” as used in the 1992 Act. Section 162 of the 1992 Act gave no statutory definition of “business”; it did not align it as a concept with trades or professions or create any special exception for cases where the business comprised wholly or mainly the holding of investments. It simply required that a person who was not a company transferred a business as a going concern to a company, so as to defer a charge to capital gains tax, where the only change that had taken place was in the form in which the business was operated from non-corporate to corporate, to the extent that the consideration consisted of shares in the company. In that context, the word “business” should be given its ordinary, wide meaning.
Although mere passive receipt of rent, unaccompanied by any activity, would not normally be regarded as the carrying on of a business, it was a question of fact as to what degree of activity was required to cross the threshold. There was no qualitative distinction between activities that were carried out in the course of passive investment and those carried out in the course of a business. The fact that activities were all of a nature that any property owner in receipt of rent might be expected to carry out did not prevent a finding that a business was being carried on. There was no requirement, in order for activities to be referable to a business, that they should be of a unique nature or different from the activities that were ordinarily associated with the management of an investment property: American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676 applied. Moreover, it was the degree of activity as a whole that was material to the question of whether there was a business, not the extent of that activity when compared to the number of properties or lettings.
In determining whether activities amounted to a business, relevant factors would include the seriousness of the undertaking, whether the activities were an occupation or function actively pursued with reasonable or recognisable continuity, the degree of substance of the activities in terms of turnover, whether the activities were conducted in a regular manner and on sound and recognised business principles and whether they were of a kind that was commonly undertaken by persons who sought to profit from them: Customs and Excise Commissioners v Lord Fisher [1981] STC 238 applied.
The FTT’s decision was vitiated by errors of law so far as it had concluded that the activities of the appellant were not a business. The FTT had wrongly focused on matters that were irrelevant to the determination that it had to make, such as the income tax treatment of activities and whether they were a trade or taxable under Schedule A in the 1988 Act. It had erred in applying a qualitative test, such that it did not regard as referable to a business those activities that were ordinarily associated with the management of investment property. It had also erred in disregarding the scale of the appellant’s activities simply because they could be explained by the size of the property and its lettings. The FTT should have found that the appellant’s activities, by reason of their character and degree, amounted to a business for the purposes of section 162.
The appellant’s son, Richard Ramsay, appeared for the appellant; Christopher Stone (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
