Tribunal Decides Property Transactions Not Subject to Income Tax, Qualify for Capital Gains Tax Exemption

Citation: [2023] UKFTT 968 (TC)
Judgment on

Introduction

The First-tier Tribunal (Tax Chamber) case of Gary Ives v The Commissioners for HM Revenue and Customs [2023] UKFTT 968 (TC) deals principally with the issue of whether profits derived from the purchase, redevelopment, and sale of dwelling houses by an individual amounts to trading profits subject to income tax or represents capital gains subject to Capital Gains Tax (CGT), potentially exempt under Principal Private Residence (PPR) relief. This article provides a structured analysis of the key topics discussed, elucidating on the legal principles applied.

Key Facts

Gary Ives appealed against discovery assessments and related penalty determinations for tax years 2003/4 to 2006/7 and three closure notices related to the tax years 2010/11, 2011/12, and 2013/14 concerning omitted property development income. HMRC contended that the profits from three property transactions were trading profits subject to income tax, while Mr. Ives asserted they were capital gains from the disposal of his sole or main residence, thus exempt from CGT due to PPR relief.

The properties in the case were:

  1. 27 Ringmer Avenue, Fulham - Purchased, redeveloped, and sold as a single dwelling.
  2. 69 Wandsworth Bridge Road - Owned briefly, bought and sold for twice its purchase price.
  3. 24 Crondace Road, Fulham - Purchased, redeveloped, and sold with a considerable profit.

The Tribunal was also tasked with determining whether rental income from another property was declared correctly and whether a penalty for deliberate inaccuracy was appropriate.

Trading Versus Capital Gains

Central to the case is the distinction between activities that constitute a trade and those that result in capital gains. The legal principles drawn upon include the badges of trade from Marson v Morton[1986] STC 463, which help distinguish between trading and investment activities by analyzing factors such as motive, frequency of transactions, finance, and the nature of the activity.

Principal Private Residence Relief

The case further examined the applicability of PPR relief under TCGA 1992 sections 222 and 223. PPR relief exempts from CGT gains arising from the disposal of an individual’s only or main residence, provided certain conditions are met. A key consideration was whether occupation qualified as residence, taking into account the nature, quality, and continuity of occupation as established in Goodwin v Curtis [1998] STC 475 and Patricia Lam v HMRC [2018] UKFTT 0310 (TC).

Deliberate Inaccuracy Penalties

Determining whether inaccuracies in tax returns are deliberate affected the Tribunal’s jurisdiction over assessments outside the normal time limits, referencing the doctrine of “deliberate inaccuracy” explored in cases like Auxilium Project Management Limited v HMRC [2016] UKFTT 249 (TC) and Anthony Clynes v HMRC [2016] UKFTT 369 (TC).

Outcomes

The Tribunal found that, notwithstanding superficial similarities to trading transactions, Mr. Ives’ narrative of intending the properties as family homes, albeit disrupted by unforeseen circumstances, was credible. The evidence did not prove deliberate behavior in misdeclaring rental income. It was judged that Mr. Ives was not involved in a trade with respect to the three properties, and the Tribunal also accepted his contention that the properties in question were occupied as a residence, thus meeting the conditions for PPR relief.

As for the additional rental income from Fullbrooks Avenue, the Tribunal held that Mr. Ives is taxable only on his share of the profit, leaving the exact figures for HMRC and Mr. Ives to agree upon.

Conclusion

In Gary Ives v The Commissioners for HMRC [2023] UKFTT 968 (TC), the Tribunal’s meticulous analysis of case law and the application of legal principles to the facts led to the conclusion that Mr. Ives’ property transactions did not amount to trading activity but fell within the realm of capital gains, with relief provided under the PPR exemption. The case aptly demonstrates the nuanced approach required in distinguishing between trading transactions and capital gains within the context of property dealings and underscores the crucial role of a taxpayer’s intention and actual usage of the property in making such determinations.

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