The First-tier Tribunal decision in Anthony Headley (TC/2012/07246) was published on 19 July 2013. It deals with the question whether the disposal of a property at 180 Grange Road should be taxed as a capital gain or, as Mr Headley’s accountant sought to argue, taxed as a trading transaction.
Facts of the case
Mr Headley bought the property in September 2001 and began to rent it out shortly after purchasing it, and declared rental income on this property each year until it was sold in December 2005.
Nevertheless, his accountant explained to the tribunal that Mr Headley had come to him stating that he wanted to include the property in his trading assets, and his tax return showed the commencement of a property development business in October 2002. His “schedule of stock” showed three properties, which included 180 Grange Road plus 81 Bowes Road, which was bought in November 2002, and 88 Broad Street, acquired in December 2002. 88 Broad Street was sold in August 2004, and HMRC accepted that this was a trading transaction. 81 Bowes Road was sold in 2010 but the treatment of this sale has not been agreed.
No evidence was provided as to why Mr Headley believed 180 Grange Road was a trading asset and nothing to support any of the badges of trade.
In order to determine how to treat the disposal of 180 Grange Road, the fundamental issue is to establish Mr Headley’s intention when he bought the property. General key factors to support the trading intention were missing including:
- Evidence to demonstrate intention to seek out buyers for the property;
- Business plans and other financial protections evidencing the reason why the property was acquired, whether any development would be made to enhance the profit on sale and ultimately what could be achieved on sale;
- Type of loan finance – borrowing short term is usually indicative of an acquisition to dispose retain the property as a long term investment.
The tribunal found that there was no reliable evidence that he acquired the property to put it into trading stock. On the contrary, the fact that he let it out either immediately or as soon as possible after he acquired it pointed towards a finding that the property had been acquired as an investment.
His accountant told the tribunal that the letting was a temporary measure for cash flow reasons. However, the tribunal did not consider that this was borne out by the facts: firstly, he rented the property throughout his period of ownership and secondly, he purchased two further
properties in November and December 2002 which indicated that he did not encounter serious cash flow problems before then.
The tribunal also considered whether there could have been an appropriation from investment to stock when the property trade started on 16 October 2002, but concluded that the commencement of trade does not provide any evidence that Mr Headley changed his intention with regard to this property. Each property must be considered on its own merits and for such a finding “precision is required” (Simmons (as liquidator of Lionel Simmons Properties Ltd) v Inland Revenue Commissioners  STC 350).
Furthermore, if there had been an appropriation there would have been a disposal for CGT purposes in October 2002, which has not been returned, and there has been no election under TCGA 1992, s 161(3) to treat the appropriation on a no gain/no loss basis.
Mr Headley absence from the hearing and lack of evidence did not help his situation but fundamentally, the case was decided on the facts surrounding the use of the property most notably the lack of evidence to support the trading intention. This case once again demonstrates the importance of establishing a clear intention on acquisition of a property, ensuring that the facts support the stated intention, and that if there is a change in intention there is sufficient precision in establishing and documenting that change.