In many areas the market for higher-valued homes has been hit by Brexit related uncertainty. Where a home has failed to sell, the estate agent may recommend a make-over to improve the attractiveness of the property to buyers.
This is exactly what happened in the case of Hopscotch Ltd, but on a grand scale, as the make-over cost £1m for a residential property valued at £13.5m before the improvements.
As company (Hopscotch) owned the property it was subject to the annual charge for enveloped dwellings (ATED). Hopscotch paid the ATED charge for 2013/14 to 2015/16, but claimed relief from ATED for 2016/17 and 2017/18 while the improvement work was underway, on the grounds that it was carrying on a property development trade. HMRC refused this claim.
The FTT examined the attributes of a property development trade, which may have implications for other property owners, especially if the appealed is taken to the Upper Tribunal where the decision will form a precedent.
Hopscotch argued that although the transaction (the redevelopment) was a one-off that doesn’t prevent it amounting to a trade, which the FTT accepted.
However, Hopscotch did not prepare a business plan or a financial forecast for the property development “trade”, and crucially it did not register for corporation tax in respect of the trade in the UK (it’s registered in the British Virgin Islands). The FTT concluded that this was not typical of the way in which a property development business would be conducted, and Hopscotch had done nothing more than maximise the value of its capital investment. It was it not have a property development trade and the ATED relief was not due.
Property owners will be relieved to learn that a property make-over, even one costing £1m, will not make them subject to income tax or corporation tax on the proceeds from the eventual sale. However, companies which are subject to ATED in respect of their properties need to be cautious about which reliefs from ATED they claim.
Written by the Tax Advice Network