Judgment summary
This case concerns four appellants who each sold shares in Highland Holdings Limited (HHL) on 2 June 2016, following exercise of an option on 22 April 2016 (1, 3). HHL's sole asset was Associated Properties UK Limited (APUK), which owned a property in Henley on Thames (1).
Each appellant claimed entrepreneurs' relief on the gain arising from the disposal. It was common ground that the claims would succeed if APUK had been a trading company throughout the Relevant Period, defined as the year to 22 April 2016 (2, 3).
HMRC initially argued that APUK was not carrying on trading activities at all, but abandoned this position during the hearing (5, 6). HMRC accepted that APUK was preparing to carry on a trade as soon as reasonably practicable, but maintained that APUK's activities included, to a substantial extent, activities other than trading activities, within section 165A(3) TCGA 1992 (6).
The Tribunal heard evidence from three witnesses for the appellants, Robert Searby, Alan Pontin and Deidre Wells, and found them all credible (8). The evidence covered the history of the property, its decline as a rental investment, the 2011 decision to pursue residential development, extensive planning and lobbying activity to secure inclusion of the property in the Henley and Harpsden Neighbourhood Plan, and the terms of an Option Agreement with Crest Nicholson Operations Limited (CNOL) dated 12 October 2012 (10-76).
Applying the approach in Allam v HMRC [2021] UKUT 291 (TCC), the Tribunal conducted a holistic, multifactorial assessment of APUK's physical and financial activities during the Relevant Period, including income, assets and expenditure (77-128). The Tribunal concluded that non-trading activities were not of material or real importance in the context of APUK's activities as a whole during the Relevant Period (129-130).
Background
HHL was set up by Alan Pontin in 1996 and later acquired a road surfacing business owning the property, which was transferred into APUK in 2000 (10). Following a bank guarantee call in 2002, APUK entered a 16-year lease with Aggregate Industries UK Ltd (AIUK) from 2002 to 2018, together with a pre-emption agreement running until 2023 (11-12).
By 2011 the property had become dated and unattractive to good tenants, and in 2011 the directors decided to pursue residential development, reclassifying the property in APUK's accounts from fixed asset investment property to trading stock (2, 14-19, 73).
On 12 October 2012 the appellants entered the Option Agreement with CNOL, granting call and put options over the HHL Shares, subject to conditions including satisfaction of a Core Strategy Condition and allocation of the property for residential development (7(3), 76). Extensive planning work followed, including securing the property's inclusion in the Neighbourhood Plan, which was approved at referendum on 10 March 2016 (7(4)-(5), 47(11)).
AIUK vacated the property in 2011 and the lease and pre-emption agreement were eventually surrendered on 2 June 2016 pursuant to a Surrender and Release Agreement dated 30 June 2015 (17, 104). The option was exercised on 22 April 2016 and the share sale completed on 2 June 2016 (7(6)).
Core dispute
The sole issue remaining before the Tribunal was whether APUK met the second limb of the definition of 'trading company' in section 165A(3) TCGA 1992, namely whether its activities during the Relevant Period included to a substantial extent activities other than trading activities (77).
HMRC accepted that APUK was carrying on activities with a view to starting a trade, but argued that its activities nonetheless included, to a substantial extent, non-trading activities such as general site maintenance and dealing with tenants (6, 88, 96, 125).
The appellants argued, relying on Allam v HMRC and other authorities, that a holistic assessment of physical activity, income, assets and expenditure showed that non-trading activity was not substantial in the context of APUK's activities as a whole (77-83, 116).
Court findings
The Tribunal applied the holistic, multifactorial approach from Allam v HMRC [2021] UKUT 291 (TCC), assessing both qualitative and quantitative aspects of APUK's trading and non-trading activities (81, 83).
On timing, the Tribunal held that it should not look only at the Relevant Period in isolation where doing so would paint a partial or incomplete picture, following Clark v Medway Housing Society Ltd [1997] STC 90, and noted that APUK's development ultimately generated profits in excess of £25 million (84-87, 110).
On physical activity, the Tribunal found that a very significant part of APUK's activity, carried out by Alan Pontin, Robert Searby, Ben Pontin and consultant Deidre Wells, was focused on securing planning approval for residential development, and that activity directed at tenants was not material (88-95, 129(1)).
On income, the Tribunal distinguished between £144,000 of rent from short-term lettings integral to APUK's preparations to trade, and £324,000 of legacy investment income from the AIUK lease, noting that this income stream was being brought to an end before the share sale (102-111).
On assets, the Tribunal held that the property was held with the predominant intention of being used for residential development, applying the approach in Lionel Simons Properties Ltd v CIR (1980) 53 TC 461 and Heather Whyte v HMRC [2021] UKFTT 270 (TC), and rejected HMRC's argument that the property could not be trading stock because no trade had yet started (112-124).
On expenditure, the Tribunal calculated that approximately £58,000 of non-management fee, non-business rates expenditure appeared linked to non-trading activity, but found this was not a fully interrogated figure and did not represent a material cost (125-128).
The Tribunal concluded that none of the physical or financial factors pointed to non-trading activities being of material or real importance in the context of APUK's activities during the Relevant Period (129-130).
Outcome
The Tribunal decided that, during the Relevant Period, APUK's activities did not include to a substantial extent activities other than trading activities, so that throughout the Relevant Period HHL was the holding company of a trading group (131). The appeals were allowed (132).
Major issues / areas of contention
- Whether APUK's activities during the Relevant Period included, to a substantial extent, activities other than trading activities under section 165A(3) TCGA 1992.
- Whether the assessment of substantiality should be confined to the Relevant Period or take account of APUK's wider history and future results.
- How to characterise rental income received during the Relevant Period, distinguishing income integral to preparations to trade from legacy investment income.
- Whether the property could be treated as trading stock before APUK had started to carry on a trade.
- How to measure and weigh expenditure as between trading and non-trading activities during the Relevant Period.
- Whether services provided by directors and consultants, remunerated by management charge, could be taken into account in assessing APUK's physical activities.