Capital gains tax – Taxation of Chargeable Gains Act 1992 – Appellant owning property divided into 10 flats – Five flats let to tenants – Appellant spending 20 hours per week on administration and maintenance of property – Transfer of property to company in exchange for shares – Respondents issuing assessment to capital gains tax – Whether appellant entitled to roll-over relief from capital gains tax under section 162 of 1992 Act – Whether transfer amounting to sale of business as going concern within section 162 – Whether appellant’s activities sufficient to amount to a business – Appeal allowed
The appellant and her husband owned a large property in Belfast, which was divided into 10 flats of which five were let to tenants. They were responsible for the administration of the property and had no other occupation. They spent approximately 20 hours per week looking after the property; they dealt with tenants, cleaned communal areas and vacant flats, maintained outside areas, including by weeding, clearing leaves and removing dumped rubbish, and carried out carrying out other works of repair and maintenance to the property. In 2004, they instructed a firm of surveyors to prepare plans for refurbishing and redeveloping the property and obtained planning permission for alterations including two extensions.
In September 2004, the appellant and her husband transferred the property to a company in exchange for shares in the company. In August 2005, they made a gift of their shares to their son, who became the sole shareholder and director of the company.
The respondents assessed the appellant to capital gains tax in the sum of £19,338.77 for the tax year 2004 to 2005. On appeal from that assessment, the appellant claimed to be entitled to roll-over relief from capital gains tax on the transfer of the property on the ground that it was a transfer of a business as a going concern by an individual to a company in exchange for shares, within section 162 of the Taxation of Chargeable Gains Act 1992.
Dismissing the appeal, the first-tier tribunal (FTT) held that the activities of the appellant in relation to the property did not amount to the carrying on of a business since they were no more than might be required or expected as incidental to the ordinary maintenance, repair and development of an investment property. In that regard, it considered the relevant distinction to be that drawn in the Income and Corporation Taxes Act 1988 between rents and receipts from property, taxable under Schedule A, and income derived from a “trade or business”, which would otherwise be assessable under Schedule D. The appellant appealed to the Upper Tribunal.
Held: The appeal was allowed.
The FTT’s finding that the activities of the appellant did not constitute a business was vitiated by an error of law, so far as the FTT had considered the essential question to be whether the appellant’s activities went beyond those of a Schedule A business under the 1988 Act such that they would be assessable under Schedule D. It should instead had addressed the straightforward, and very different, question of whether the appellant’s activities in relation to the property constituted a business. The distinction drawn between a trade taxable under Schedule D and property income taxable under Schedule A was not material to the interpretation of the word “business” in the context of the 1992 Act. Section 162 of the 1992 Act gave no statutory definition of “business”, did not align it as a concept with trades or professions and created no special exception for cases where the business comprised, wholly or partly, the holding of investments. Instead, it required that a person who was not a company transferred a business as a going concern to a company, with the purpose of deferring capital gains tax where the only change that had taken place was a change in the form in which the business was carried on, from non-corporate to corporate, to the extent that the consideration consisted of shares in the company. The legislation was looking at business in the context of something that could be carried on by both an individual and a company. In that context, the word “business” should be construed broadly, according to its ordinary meaning.
The FTT had further erred in its view that the activities required in order to establish a business had to of a different or unique nature over and above those that might be required or expected as incidental to the ordinary maintenance, repair and development of an investment property. The degree of activity that was required to cross the threshold for the carrying on of a business was a question of fact. There was no qualitative distinction between activities that were carried out in the course of a passive investment activity and those carried out in the course of a business. Activities of a kind that might be expected to be carried out by any property owner in receipt of rent could none the less be sufficient to support a finding that a business was being carried on: American Leaf Blending Co Sdn Bhd v Director General of Inland Revenue [1979] AC 676 applied.
The FTT had been wrong to disregard the scale of the appellant’s activities simply because they could be explained by reference to the size of the property and its lettings. 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. Further, as to the appellant’s proposed refurbishment and redevelopment work, there was no reason why activities undertaken to maintain or enhance an existing investment property, and thereby enhance the available returns, should not be equally compatible with the appellant carrying on a business. The FTT should have found that the appellant’s activities amounted to a business for the purposes of section 162: Customs and Excise Commissioners v Lord Fisher [1981] STC 238 considered. Although each of the appellant’s activities could equally well have been undertaken by a mere property investor, they amounted to a business in circumstances where the degree of the activity outweighed that which a passive property investor, even a diligent and conscientious one, might normally be expected to carry out.
Richard Ramsay, the appellant’s son, appeared for the appellant; Christopher Stone (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
