UK and International Tax news
Tax Treatment Of Property Business
Tuesday 9th April 2013
An appeal has been recently heard by the First Tier Tribunal [FTT] in Albermarle LLP v CIR [TC2501] in relation to whether losses incurred by the appellant from the purchase and resale of three commercial properties were losses attributable to the appellant’s UK property business (per s.264 ITTOIA 2005) or whether the losses were trading losses. The tax years in issue were 2005-06, 2006-07, and 2007-08.
The appellant contended that at the time it bought the properties, which were untenanted, its intention was to improve the value of the properties by securing tenants and then to sell the properties on within a period of three to six months. This intention did not change throughout the relevant years.
HMRC contended that the appellant’s intention was to continue to hold the properties once tenants had been secured in order to receive rental income. The lack of an intention to trade was also consistent with the way the appellant had compiled its balance sheets and completed its tax returns for the relevant years. The losses were therefore not trading losses but losses attributable to the appellant’s UK property business.
While appeals by the members of the appellant in relation to their own tax positions were not before the FTT, the significance of the nature of the losses was that if the losses were determined to be UK property business losses, the members of the appellant would not then able to set the losses against their general income.
With regard to the 2005-06 tax year, HMRC made a discovery amendment to the 2005-06 partnership statement classifying the Sch D case I loss returned as a property income loss. Although HMRC did not cite which statutory provision this was made under, their skeleton argument referred to s.29 TMA70. However, the appellant argued that this could not be right as s.29 provided for discovery assessments to be made only in relation to a tax return made and delivered under s.8 TMA70 (personal return) or s.8A(trustee’s return), not a partnership tax return. As no such personal or trustee’s returns were in issue, s.29 could not provide the basis for amending the partnership statement. Reference was also made to s.30B but the Judge confirmed that this could not apply and held that the discovery amendment was ineffective and the appeal in relation to the amendment of the partnership statement for 2005-06 was therefore allowed.
In relation to the two later tax years, the Judge held that in relation to each of the factors put forward by the appellant which were said to be indicative of a trading intent (properties bought untenanted, financing structure, presence of personal guarantee, changes to asset, duration of letting agreement, and method of sale), he reached the view that while these factors were not inconsistent with the appellant’s case, they were equally consistent with HMRC’s view that the appellant’s intention was to hold on to the properties and let them out.
The Judge also commented on the presentation of the results of the business in the annual accounts which were prepared on a trading basis for the first two years in question and then on a property income basis for the third. Overall however, the Judge was satisfied that the combination of certain evidence supplied by the Appellant more than outweighed the point taken in HMRC’s favour in relation to the completion of the 2007-08 tax return and, on balance, he found the appellant’s intention was to trade in the properties not hold onto them to earn rental income from them. In addition the evidence did not suggest that this intention changed during the period up to the eventual sale of the properties.
In relation to the appeals for 2006-07 and 2007-08, the losses in issue were held to be trading losses and not property income losses.
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