Property development and property development trade
Analysis of an important First Tier Tribunal outcome.
In Hopscotch Limited v HMRC  TC07127 the First Tier Tribunal (FTT) has ruled that a property development did not amount to a property development trade. Relief for the Annual Tax on Enveloped Dwellings (ATED) was denied.
The ATED was introduced from 1 April 2013 and is an annual charge payable mainly by companies that own UK dwellings with a value of £500,000. Its purpose was to discourage wealthy foreigners from holding high value properties through offshore companies, and thus avoiding CGT, IHT and possibly SDLT.
Finance Act 2013 ss 132-150 provides reliefs from ATED for property rental businesses, dwellings opened to the public, property developers, property traders, financial institutions acquiring dwellings in the course of lending, farmhouses, providers of social houses.
Hopscotch Limited was a BVI company which purchased a residential property in 1993 for £1.25m. In 2011 the property was placed on the market at an asking price of £13.5m.
In the absence of anyone willing to buy the property at the asking price, in 2014, the directors decided to redevelop it with the aim of maximising the value. The aim was to make the property an attractive ‘near new build’. In October 2017 the property was put back on the market.
ATED returns were submitted and tax was paid for the three years up to 31 March 2016. For the two years to 31 March 2018, relief was claimed on the basis that the company was carrying on a property development trade. Following enquiry, HMRC denied relief and Hopscotch appealed.
According to the legislation (section 138 to the FA 2013) reliefs apply where property is being redeveloped or held as stock within a property development trade, where the interest is held exclusively for the purpose of developing and reselling the land in the course of the trade.
‘Property development trade’ means a trade that consists of buying and developing for resale residential or non-residential property and is run on a commercial basis and with a view to profit.
The parties did agree that a redevelopment of the property had taken place but while Hopscotch argued that since 1 April 2016 it had carried out a trade, HMRC was of the view that it did no more than any other owner wishing to maximise the sale of an asset.
Hopscotch argued that, with effect from 1 April 2016, when the redevelopment work commenced, it was carrying on a ‘property development trade’ and therefore the property, which had hitherto been held as an investment on capital account, should be regarded as having become trading stock on that date. Hopscotch argued that from that date, it held the property exclusively for the purposes of redeveloping and selling the property in the course of that trade.
The decision to take the property off the market, seek consultancy advice and incur redevelopment expenditure should be seen as a ‘scheme for profit-making’.
HMRC stated that while they accepted that the work carried out at the property between April 2016 and September 2017 was so substantial that it amounted to ‘redevelopment’, that ‘redevelopment’ did not take place in the course of a ‘property development trade’.
The company was doing no more than any other owner of an investment held on capital account who wished to sell the investment and to maximise the value of the investment before doing so.
In any event, in order to satisfy the definition of ‘property development trade’, the company would need to have had the intention to develop and resell the property at the time when it first bought the property. The company did not have that intention in 1993, when it first acquired the property.
The FTT looked first at the various badges of trade. However, these turned out to be inconclusive as while some factors might be taken to suggest that the company carried on a trade (such as it borrowing money to carry out the development, and work being done for the purpose of resale), other factors (such as the redevelopment and proposed sale of the property being a one-off transaction, and the subject matter being capable of being held as investment as well as stock) suggested that this was not the case.
The judge stated that, in certain circumstances, it is perfectly possible for the redevelopment of a single property to amount to a venture in the nature of trade and for a person holding a property as an investment on capital account to resolve, at a particular point in time, that it will henceforth hold the property for a trading purpose and thereby appropriate the property from capital account into trading account.
no mention is made in the minutes of the board meetings of the company about the expected cost of the redevelopment or the amount of profit to which the redevelopment was expected to give rise
there is no evidence that either before the commencement of the redevelopment work, or during the course of that work, the company produced any trading accounts or business plan which showed the level of profit to which the redevelopment activity was expected to give rise
the company has never registered for UK corporation tax and has never filed company tax returns
…it was concluded that the company was not ‘carrying out a scheme for profit-making’.
Instead, the company, having failed to realise the sum which it desired for the property in the course of its marketing of the property between 2011 and 2013, simply resolved that, in order to obtain an acceptable offer for the property, it would need to carry out substantial work before putting it on the market again.
In the FTT’s view, the property did not, as a result of the company’s implementing that decision, cease to be the investment held on capital account which it had always been for the company since it first acquired the property in 1993 and the company did not, as a result of implementing that decision, start to carry on a trade.