We act for a comedian, actor and writer who, in 1996, purchased a second property less than three miles away from his residence with the intention of using this as a 'writing studio'. Our client found it more convenient and conducive — to effective writing and rehearsing — to work in an environment away from the distractions of his home. The property was purchased with the intention of it being used solely for business purposes; it was used for writers' meetings, rehearsals, interviews, publicity meetings and at no time was it used for residential purposes.
We act for a comedian, actor and writer who, in 1996, purchased a second property less than three miles away from his residence with the intention of using this as a 'writing studio'. Our client found it more convenient and conducive — to effective writing and rehearsing — to work in an environment away from the distractions of his home. The property was purchased with the intention of it being used solely for business purposes; it was used for writers' meetings, rehearsals, interviews, publicity meetings and at no time was it used for residential purposes.
The premises were subsequently sold and our predecessor firm claimed 75% business asset taper relief.
The Inland Revenue is now questioning whether the property was used solely for business purposes because a 50% council tax reduction was claimed on the basis that the property was our client's second home. The Revenue suggests that this indicates an intention to use the property for both residential and business purposes and that the gain needs to be apportioned in respect of business and private taper relief. The Revenue also asks why the property was not registered for business rates.
There is no question that the client applied for a 50% reduction in council tax without thinking through the implications or receiving advice from his previous accountants. He considered that he would not be making the same claims for services from each council.
We consider the Revenue's argument to be undermined by the fact that the second property is less than three miles from our client's main residence.
Do readers consider that the claim for business asset taper relief can be overturned by the Revenue purely on the basis of an application for 50% council tax relief? The Inspector is proposing a 50-50 apportionment in respect of the claim that has been made.
(Query T16,548) — Comic.
The use to which the property was put during the client's ownership of it is one of fact. If, as is suggested, the second property was purchased solely with the intention of using it for business purposes and, as a question of fact, it was only used as such, then business taper relief must be available in full. A mistake, or even a deliberate decision, to pay council tax rather than business rates cannot, of itself, change the facts of the use that was made of the property.
However, in situations such as this, the answer to the factual question of the use to which the property was put will need to be supported by evidence. If all of the evidence except for the council tax supports full business use, then 'Comic' should be successful in defending the position, if necessary, before the Commissioners.
There are a few points that seem worthy of note in helping 'Comic' with his defence or in deciding that negotiation is the better route.
It is helpful that the second property was close to the client's home, as someone is unlikely to have bought such a nearby property to use as a second home.
We are given no information on the size of the property. If the property was fairly small so that a clear business purpose can be identified for each room, this will support the position. If it was large, it might do the reverse.
Can the client confirm that neither he nor any visitors ever slept overnight in the property? With this declaration, the Inspector's contention that there was a residential purpose for acquisition would seem to be untenable.
Was any expenditure claimed in the accounts to convert any of the rooms for a special purpose, e.g. as a recording studio? Such expenditure would both demonstrate business use and the lack of a residential purpose.
Is there any written evidence to demonstrate the client's intentions when purchasing the property, such as communications with his agent or solicitor?
It was purchased before the introduction of the taper régime and so paying a reduced rate of tax on a capital purchase/investment could not have been a motive.
Presumably the property has not been let during his period of ownership. If it has, this would suggest some investment motive for the purchase. Provided that the evidence supports pure business use, the fact that the property has grown in value will not in itself be sufficient to demonstrate that the true motive for purchase was to make a gain.
What was the actual level of business use made of the property? If it was regularly used five days a week during his ownership, then this will be strong evidence in support of his position. Again, a written declaration from the client may be useful. As a writer, did he keep a diary? Perhaps this records where he worked and could be presented as evidence. Hopefully, the argument for business asset taper relief should be enhanced by such evidence. — Wentworth.
'Comic' asks a specific question as to whether or not a single piece of evidence (the application for council tax relief) can resolve the business asset status of an asset; however, surely this is not the real point at issue? It would seem that the question 'Comic' needs to address is the use made of the house at all times in the relevant period of his client's ownership. The council tax application may be one clue, but surely this should not be taken in isolation.
We know that the relevant definition of 'business asset' for taper relief purposes, is an asset used, wholly or partly, for the purposes of a trade carried on by the individual (either alone or in partnership) (see TCGA 1992, Sch A1 para 5). This is modified for periods following 5 April 2004 to include use in any trade or trading partnership. It is clear that it is the use made of the asset which determines whether or not it qualifies as a business asset, and not the intention of the taxpayer when he acquired it or at any subsequent time. Any suggestion by the Revenue that 'intention' comes in to it should be calmly rejected.
We also know from Sch A1 para 3 that any part of the gain that is not a gain on the disposal of a business asset is taken to be a gain on the disposal of a non-business asset. Although it is not entirely clear, this may be interpreted to mean that where the asset is not being used for business purposes, it is to be taken as being used for non-business purposes. 'Comic' mentions some of the uses to which the house was put: writers' meetings, rehearsals, interviews, etc. We do not know how often these meetings were held; however, it is difficult to see that the house would have been occupied for business use every day throughout the relevant period. To qualify for business use, it may be that the house would have to be used constantly, for example as an office. There are a number of questions about taper relief to which we do not know the answers despite the Revenue's interpretations in its Tax Bulletin publications, etc. The amount of 'use' needed to qualify as a business asset may be one of these questions. Does the asset have to be used in the business during every working day, every hour? If taken literally, then this would seem to be the case, but clearly taken to this level, this is impractical.
The Revenue may try an attack using Sch A1 para 9 which describes the position where an asset is used simultaneously for both business and non-business uses. In such a case, the gain is to be apportioned into two notional gains, subject to business asset and non-business asset rates of relief respectively. In 'Comic's' case, the asset is the house. Can it be said that all of the house has been used for business purposes at any one time? Have the bedrooms and the bathrooms been so used as well as the living rooms? If this is not the case, then I think there is a strong argument that para 9 applies and the gain will have to be apportioned on any reasonable basis. This gives 'Comic' the potential for two sets of apportionment.
There are many aspects to taper relief which are untested and remain unknown. In this case the Revenue appears to be adopting a reasonably practical approach, where the Inspector probably has a gut feeling that 100% business use is inappropriate. With this in mind, the Inspector has grasped a piece of evidence to propose a compromise. Does 'Comic' and his client have any evidence to support the initial claim, or indeed any alternative apportionment? It may be that the Inspector will be willing to accept an alternative for which there is some supporting evidence.
I am all for a vigorous pursuit of a case where there is a basis for success, but if 'Comic' explains all of the above to his client, it may be that the proposed 50-50 apportionment of the gain is not such a bad deal after all.