Bhikhi
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 May 2020 |
| Neutral Citation | [2020] UKFTT 243 (TC) |
| Date | 29 May 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 243 (TC)
Judge Heidi Poon, Charles Baker
Mr Jamal Khan, CTA FCCA, instructed by Churchill Tax Advisers, appeared for the appellant
Mr John Corbett, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Capital gains tax – Transfer of property to a connected party to raise a mortgage – Whether transfer a disposal for capital gains purposes – Court Order governing the transaction – contract for sale and completion – Whether TCGA 1992, s. 60 as regards nominees and bare trustees – Whether liability affected by the transfer being under an implied trust – Constructive or resulting – TCGA 1992, s. 68, 70 – Discovery assessment under TMA 1970, s. 29 stands good – Penalty for inaccuracy in return under FA 2007, Sch. 24 confirmed – Appeal dismissed.
The FTT decided that there had been a disposal of the property, that on the balance of evidence, the transferred property had not been held by the transferee as nominee or bare trustee, and that the appellant had failed to show that no chargeable gains arose because of the existence of an implied trust.
The appellant, Mr Asif Bkikhi (Mr Asif), was one of three brothers. He and one brother, Mr Sajid Bhikhi (Mr Sajid) had acquired 121/123 High Street, Plaistow (the property) in 2001. Mr Asif and Mr Sajid were subsequently convicted of fraud and a confiscation order was imposed against both in the sum of £212,861 each. Mr Asif and Mr Sajid could not mortgage the property to raise funds to meet this obligation because of the confiscation order. They entered into an agreement with another relative (Mr Irfan) under which the property would be transferred to a company that he owned (MIS Business Solutions Ltd (MIS)) for £499,000 (to be used to make the payments due under the confiscation orders) that MIS would raise by mortgaging the property. Mr Asif and Mr Sajid would continue to manage the property but would pass the rents to MIS to meet the mortgage (and pay any shortfall personally) and, once Mr Asif's business was “back on its feet”, the property would be transferred back to the brothers. Subsequently, the High Court granted a variation of the restraint order allowing the sale to MIS to go ahead in May 2012. In 2018, Bhikhi Properties Ltd (BPL), a company established by the third brother (Mr Maksud) bought back the property from MIS for £499,000 (although it was then worth over £1m as, in the meantime, it had been further developed by Mr Asif and Mr Sajid). Once the other two brothers had paid off their debts, it was intended that BPL would be owned by the three brothers jointly but in order to benefit the whole extended family (of thirty-nine members). Throughout the period that the property was held by MIS, the company (rather than Mr Asif and Mr Sajid) included the rental income in its self-assessment return and the property was shown on its balance sheet. It also recorded a capital loss on the disposal. The land registry form TR1 relating to the transfer to MIS showed that the box for “declaration of trust” had been left blank. The sale was carried out by an agreement incorporating the standard conditions of sale (the conveyancing agreement). However, a letter from Mr Irfan was produced (dated in 2016), in which he stated that MIS held the property on implied trusts for Mr Asif and Mr Sajid, who would be entitled to all capital profits and responsible for upkeep and maintenance.
HMRC raised a discovery assessment on Mr Asif (the appellant) for CGT in relation to tax year 2012–13 and a penalty assessment for inaccuracies in the self-assessment return, both of which were appealed. (It is understood that similar assessments were raised in relation to Mr Sajid, but these were not the subject of this appeal).
The issues to be determined by the Tribunal were whether the discovery and penalty assessments were validly made and, in relation to the transfer of the property in May 2012 (in respect of which the appellant bore the necessary burden of proof) the issues were :
- Whether there was a disposal under TCGA 1992, s. 1(1) in May 2012;
- Whether TCGA 1992, s. 60 (nominees and bare trustees) applied to the transfer;
- Whether there was an implied trust and the implications of TCGA 1992, s. 68ff.
In relation to the discovery assessment, the onus was on HMRC to prove that it was validly made. As the disposal of the property had not been included in Mr Asif's tax 2012–13 tax return, the condition in TMA 1970 s. 29(5)(a) was satisfied and the discovery assessment had been made within the four-year time-limit. The Tribunal also upheld the penalty assessment, concluding that there had been “careless” behaviour and noting that HMRC had given full mitigation for co-operation.
Based on the available evidence, including the conveyancing agreement and form TR1, it was clear that the legal formalities under the Law of Property (Miscellaneous Provisions) Act 1989 had been satisfied and the FTT therefore concluded that there had been a disposition of both the legal and equitable interests in the property and consequently a disposal for the purposes of TCGA 1992, s. 1(1).
The appellant's case was that because MIS was acting as bare trustee, TCGA 1992, s. 60 operated to ensure that there was no disposal. However, the appellant had failed to meet the evidential burden of proof that a bare trust existed – there was no declaration of trust in writing, as stipulated by Law of Property Act 1925, s. 53 and there had been no appointment of a trustee (Trustee Act 2000, s. 16). Moreover, the commercial reality was that MIS had had to become the owner, rather than bare trustee, of the property in order to raise a mortgage on the property.
As there was no express trust, nor a statutory trust, the only types of trust that could have existed were either a constructive trust or a resulting trust.
It there had been a constructive trust between the Bhikhi brothers and MIS (and the Tribunal made no finding of fact on this issue) whereby MIS held the property on trust for the brothers and the extended family, the corollary must be that the property had become settled property (TCGA 1992, s. 68) and therefore there was a disposal for CGT purposes under s. 70, hence this did not assist the appellant's assertion that there had been no disposal for CGT purposes.
A resulting trust could have arisen if the beneficial interest in the property had resided in Mr Asif and Mr Sajid and the extended family, who had then authorised MIS to secure a mortgage on the property. However, the conveyancing agreement in May 2012 had effected a disposition of the beneficial interest in the property and its legal effect could not be circumvented.
The appellant had therefore failed to show that no chargeable gains arose because an implied trust was in place.
The appeal was dismissed and the assessments confirmed in full.
It is easy to see how this appeal arose. The appellant had acted in accordance with a family arrangement to enable another family member to mortgage a property that the appellant and his brother were unable to do in person, and assumed that the tax effects would flow from that. However, the Tribunal had to analyse the legal effect of the actual transactions that had taken place.
[1] This is an appeal against two assessments in relation to the tax year 2012–13:
- A discovery assessment for capital gains tax (CGT) in the sum of £43,855 pursuant to s 29 of the Taxes Management Act 1970 (TMA) issued on 13 March 2017, and confirmed in a view of the matter letter dated 29 May 2018 following the conclusion of Alternative Dispute Resolution (ADR) process between the parties;
- A penalty assessment issued on 29 May 2018 under Schedule 24 of the Finance Act 2007 (Sch 24) in the sum of £6,578.25 for inaccuracies in the self-assessment (SA) return submitted.
[2] The taxpayer submitted the Notice of Appeal to the Tribunal on 15 August 2018 when the relevant time limit was 28 June 2018. The explanation given for the late submission was the appellant's ill health due to the stress of the tax investigation. HMRC's Statement of Case noted the position of the late appeal, but did not oppose it. As the delay was not serious, and the parties had prepared for a hearing on a substantive basis, we gave permission to admit the late appeal.
[3] The subject matter of the transaction behind the discovery assessment for CGT was the property at 121 and 123 High Street, Plaistow in London, which comprised shop premises and flats above (“the property”).
[4] The statutory provisions from the Taxes Management Act 1970 (“TMA”) relevant to this appeal are the following:
- Section 29 TMA provides for an assessment to be raised where a loss of tax is discovered and where the requisite conditions have been met. Under s 29(4), the requisite condition is that the loss of tax has been brought about carelessly or deliberately by the taxpayer or his agent.
- Section 34 TMA provides for the ordinary time limit for an assessment under s 29 to be made within 4 years after the end of the year of assessment to which it relates.
- Section 36 TMA provides for different time limits for a s 29 assessment to be raised where the loss of tax has been brought about carelessly or deliberately. The time limit is 6 years after the end of the year of assessment to which it relates if the loss of tax has been brought about carelessly, and is extended to 20 years in a case where the loss of tax has been brought about deliberately.
- The Tribunal's appellate jurisdiction is provided under s 50 TMA. On an appeal to the Tribunal, if the Tribunal decides that the appellant is overcharged by an assessment, the assessment is to be reduced accordingly, but otherwise the assessment or statement shall stand good as provided by s 50(6). Conversely, s 50(7) provides that if the appellant is...
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