A client who is a builder has developed a block of eight flats over a period of eleven years. These are owned jointly with his wife and have provided a rental income over the period with no disposals having occurred. A number of other properties are also owned jointly and provide rental income.
A client who is a builder has developed a block of eight flats over a period of eleven years. These are owned jointly with his wife and have provided a rental income over the period with no disposals having occurred. A number of other properties are also owned jointly and provide rental income.
The husband and wife also run a company which provided building maintenance services for five years, before undertaking a residential development during 2003, converting disused commercial premises into four flats. It also provided building services in the construction of some of the aforementioned privately-owned flats.
The clients are now considering transferring two of the eight flats into trust for their adult children to provide income at university. The clients have no recent history of making disposals liable to capital gains tax. Readers' comments are sought as to the likelihood of the flat disposals being chargeable as capital gains rather than to income tax.
Query T16,628 — Tapered.
Reply by Hodgy
Tapered's clients make their living from building property and providing property-related services and so this raises the possibility that the disposal of the two properties might be taxed as profit of a trade. It is assumed that the trust mentioned in the query is a discretionary trust and that if it is a capital gain, the gain is to be held over by making a joint election under TCGA 1992, s 260.
It is certainly correct that the sale of a property by a builder does cause HMRC to question whether the transaction is really a capital gain or if it is a trade. I would refer Tapered to the HMRC Business Income Manual at para BIM20270. In particular, I would draw his attention to the case of Harvey v Caulcott 33 TC 159 mentioned there. In that case, a builder had built some properties and sold them many years later and those disposals were held to be capital gains.
The Business Income Manual includes the following quote from the case.
'Such a case as the present is always coloured by the fact that the man is a builder. That no doubt puts a particular onus on him, to show that the profit from the sale of some property is profit from an investment, or profit from something which is not trading stock. That onus is not incapable of discharge.'
However, builders are no different from any other taxpayer in that this question of trade or capital gain has to be determined by reference to the badges of trade as developed by the courts over the years. The nature of the asset is one of the tests that might lead you to consider that this transaction is an adventure in the nature of a trade in that, for this client, property is a trading medium.
On the other hand, the circumstances surrounding realisation are that the client wants to pass some assets into trust within the family. This is not a disposal to realise cash, as would be the case with a trading transaction.
Period of ownership is another factor and a period of eleven years in total would again lead me to think that this is not a trading transaction, although eleven years is the total period and we are not told the period since the flats in question were constructed.
A major factor in determining tax treatment is the motive of the taxpayer when the asset was acquired. No information is given as to motive, but the period of ownership leads a person to think that this is a long-term investment for the family and may effectively be the client's pension. The fact that, when in the trust, the properties are to be retained to produce an income stream is further evidence that this is a capital gain.
However, the point that has been made by the courts is that you should not look at individual tests, but at the overall picture, applying what is referred to as 'the elephant test'. Questions of trade or capital gain are often only resolved by looking at all of the facts in intricate detail, but on the facts provided and the way they are presented, it is my opinion that the disposal in this instance will be taxed as a capital gain.
