Ramsay v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 May 2013 |
| Neutral Citation | [2013] UKUT 226 (TCC) |
| Date | 10 May 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 226 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Judge Roger Berner.
Capital gains tax - TCGA 1992, Taxation of Chargeable Gains Act 1992 section 162s. 162 - Roll-over relief on transfer of a business as a going concern to a company in exchange for shares - Whether activities of appellant in relation to a property divided into let flats amounted to a business - Whether approach of First-tier Tribunal was correct in law.
The Upper Tribunal has overturned a First-tier Tribunal decision on roll-over relief on transfer of business (also known as "incorporation relief") in Ramsay[2012] TC 01871, ruling that incorporation relief was available in relation to a property letting enterprise. This was on the basis that the activity undertaken in respect of the property "was sufficient in nature and extent to amount to a business".
Mrs Ramsay owned a large house in Belfast, which was divided into ten flats and let out. Mrs Ramsay and her husband (who had no other occupations) spent approximately 20 hours per week carrying out various activities in relation to the property, including meeting tenants, paying electricity bills for communal areas and repairing and maintaining communal areas. When Mrs Ramsay transferred the property to a company she assumed that incorporation relief would be given on the deemed disposal on the basis that letting the property constituted a "business".
HMRC disallowed the incorporation relief on the basis that the property was an investment and not a business. The First-tier Tribunal agreed that no business was being carried on, deciding instead that Mrs Ramsay's activities were "normal and incidental to the owning of an investment property". In making this decision the tribunal regarded the essential question to be "whether the activities of (Mrs Ramsay), as a landlord, are sufficient to distinguish the property letting business carried out by her from a normal Schedule A taxable concern".
Mrs Ramsay appealed to the Upper Tribunal, which allowed her appeal. HMRC argued that the Upper Tribunal should not interfere with the judgment reached by the First-tier Tribunal as the case was one of fact. However, Mr Roger Berner did not agree, saying that "considering the decision of the FTT as a whole, it is clear to me that its finding was based on an error, or errors, of law". The Upper Tribunal decided that "the proper approach … is to construe "business" broadly, according to its unvarnished ordinary meaning" and not in relation to meanings given by other tax law. The Upper Tribunal considered six criteria, taken from the case of C & E Commrs v Lord FisherVAT(1981) 1 BVC 392, and the degree of activity undertaken, to determine whether the property was a business. On this basis Mr Berner found that the property was a business for the purpose of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 162s. 162.
The decision is good news for landlords considering incorporating a property letting business, although it should be remembered that in this case Mrs Ramsay and her husband spent 20 hours a week managing the property. The case highlights that there are different rules to be considered when deciding whether a property letting business is a business for income tax, capital gains tax, National Insurance contributions or VAT or whether it qualifies for inheritance tax business property relief.
For commentary on capital gains tax incorporation relief, see the CCH British Tax Reporter at 574-100ff.
[1]The Appellant, Mrs Ramsay, appeals, with the permission of this Tribunal, against the decision of the First-tier Tribunal ("the FTT") (Judge Huddlestone and Mr Hennessey) released on 25 January 2012.
[2]The issue before the FTT was whether Mrs Ramsay had, on 16 September 2004, transferred to a company, TPQ Developments Limited ("TPQ"), a business as a going concern in exchange for shares issued by TPQ, so as to qualify for roll-over relief in accordance with Taxation of Chargeable Gains Act 1992 section 162s. 162 of the Taxation of Chargeable Gains Act 1992 ("TCGA").
[3]The FTT decided that what Mrs Ramsay transferred to TPQ was not a "business" within the meaning of s. 162, and that accordingly the transfer did not qualify for relief. It is from that decision that Mrs Ramsay now appeals.
[4]Although there are a number of conditions to be satisfied in order that Taxation of Chargeable Gains Act 1992 section 162s. 162 TCGA can apply, the only issue is whether Mrs Ramsay was, at the date of the transfer to TPQ, carrying on in respect of what was transferred a business as a going concern. Indeed, there was no particular issue as to the going concern element of this requirement. The question is: was what was transferred to TPQ a business?
[5]The conditions for the obtaining of roll-over relief in these circumstances are set out in Taxation of Chargeable Gains Act 1992 section 162 subsec-or-para 1s. 162(1) TCGA which provides:
This section shall apply for the purposes of this Act where a person who is not a company transfers to a company a business as a going concern, together with the whole assets of the business, or together with the whole of those assets other than cash, and the business is so transferred wholly or partly in exchange for shares issued by the company to the person transferring the business …
[6]The relief is applied by reducing the chargeable gain that would otherwise arise on the disposal of relevant assets. The amount of the reduction depends on whether the whole consideration, or only part of the consideration, for the transfer of the business is provided in the form of shares. Where, as in this case, the consideration is wholly in the form of shares, the relief given is generally the full amount of the chargeable gain. The corollary, and the reason this is a roll-over relief, is that the base cost of the shares is reduced by a corresponding amount, so that the gain will be brought into charge on a relevant disposal of the shares.
[7]If the relief does not apply, the gain on the disposal of the relevant assets to the company is chargeable. HMRC raised an assessment in this respect on Mrs Ramsay for the tax year 2004/05 in the sum of £19,538.77.
[8]There was no material dispute on the facts before the FTT.
[9]Mrs Ramsay inherited a one-third share of Moat House, Moatland, Old Holyrood Road, Belfast ("the Property") in 1987. The Property is a single large building, divided into 10 flats, of which five were occupied at the relevant time.
[10]In February 2003 Mrs Ramsay made a gift to her husband of one-half of her own one-third share. In February 2004, Mrs Ramsay purchased the remaining twothirds share of the Property from her brothers with the assistance of a bank loan.
[11]On 16 September 2004, each of Mr and Mrs Ramsay transferred the Property, subject to the then existing bank loan, to TPQ in exchange for shares in TPQ. On 1 August 2005 each of Mr and Mrs Ramsay made a gift of all the shares in TPQ to their son, Mr Richard Ramsay, who became the sole shareholder and director of the company.
[12]The FTT summarised the activities carried out by Mrs Ramsay in connection with the Property at [18]. Although the FTT referred to this summary as being of chains of correspondence and assertions made on behalf of Mrs Ramsay, there was no dispute on any of the matters listed, and I accept these as findings of fact by the FTT. The summary was as follows:
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(2) Upon taking over the administration of the Property in 2002, Mrs Ramsay and her husband arranged to meet each of the then five tenants to explain that the rent must be paid on time and to the accountant (who was at that time responsible for dividing the income amongst the various owners).
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(3) Mr and Mrs Ramsay took responsibility for the checking and payment of quarterly electricity bills for the communal areas.
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(4) Upon acquisition of the Property outright (after the acquisition of the remaining two-thirds share), Mr and Mrs Ramsay took responsibility for cancelling previous insurance policies and arranging a new policy in Mr and Mrs Ramsay's sole names.
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(5) Mrs Ramsay attended the Property to unblock the drains (five in number).
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(6) Mrs Ramsay and her son oiled and re-attached steel wires on some of the garage doors belonging to the flats, and cleared the debris from previous tenants which had accumulated in other garages.
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(7) Mr and Mrs Ramsay took responsibility for returning post for previous tenants to the various senders.
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(8) They confirmed with Belfast City Council compliance with fire regulations and installed/replaced fire extinguishers where applicable.
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(9) A post and wire fence and hedging was erected at the rear of the Property to segregate it from adjacent land.
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(10) A flower bed was created in front of the hedge.
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(11) The shrubs around the Property were pruned and leaves swept up and discarded in the local refuse tip.
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(12) The back garden and car park were weeded on a regular basis.
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(13) The flagstones to the rear of the building were bleached to ensure removal of algae.
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(14) The communal areas were vacuumed and dusted on a regular basis and the mahogany staircase polished.
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(15) Mr and Mrs Ramsay frequently, when passing the Property, checked the security of the windows and doors at the rear of the building.
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(16) On occasion Mrs Ramsay found rubbish dumped in the car park of the building which she took to the Council tip.
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(17) Vacated flats were cleaned and cleared of furniture abandoned by previous tenants in preparation for new tenants.
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(18) Additional assistance was provided in particular to one elderly tenant, including dealing with telephone calls from the tenant regarding alleged faulty electricity supply, replacement of a broken window and liaising with social...
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