Pete Miller, The Miller Partnership
Peter Rayney, Peter Rayney Tax Consulting Ltd
Steven Bone, Gateley Capitus
Chris Erwood, Erwood & Associates Ltd
David Hannah and Roger Bindschedler, Cornerstone Tax
Owain Thomas QC, 1 Crown Office Row
- Chris Williams, Mazars LLP
Demergers: ‘what’, ‘why’ and ‘how’
Pete Miller discussed the demerging of property investment companies. A ‘demerger’ broadly involves splitting the business of a company or group. The shareholders of the company will generally be the same, although in some demergers the businesses are partitioned between the shareholders. No consideration is given for the demerger at shareholder level, although cash and other assets may be divided between the companies to equalise their values (as far as possible).
Pete explained that there are three merger mechanisms: (a) distribution in specie; (b) liquidation; and (c) reduction of capital. All three demerger mechanisms are based in company law. There are tax provisions to exempt a demerger as a distribution for tax purposes (CTA 2010, s 1074). However, the exemption applies to splitting trades, not property investments.
There is sometimes a concern that splitting assets between separate companies might be caught by the ‘value shifting’ anti-avoidance rules if the assets are not split in equal values. However, Pete pointed out that he has never seen HMRC take this point. In any event, the special rules for reconstructions deem no disposal to have taken place.
Property investment and property dealing companies
Peter Rayney outlined the various categories of property companies: (1) Property investment companies generally hold properties for long-term investment and generate a return from their rental income. Such companies can claim capital allowances on qualifying plant and integral features within the building (subject to the long leasing rules). However, no capital allowances can generally be claimed on plant used in a dwelling house.
(2) Property development companies generally acquire land or property with a view to development or substantial renovation. The completed development would realise a trading profit/loss. The properties may sometimes be let on a short-term basis (e.g. due to poor market conditions) until the properties can be sold for their expected market price. Such letting should not normally interfere with the ‘trading’ status of the company (Oliver J&C v Farnsworth  37 TC 51).
(3) Property dealing companies normally acquire properties to make a short-term gain, but do not actually carry out any substantive renovation development work. HMRC may try to contend that the properties were acquired as an investment. However, if the company’s objective is to buy properties with a view to selling them on at a profit, any HMRC challenge should be easily rebutted.
(4) Mixed or ‘hybrid’ property companies may carry on a mix of investment, trading and dealing activities. It will be necessary to compute taxable income under different rules (e.g. property rental income be calculated under the property business provisions, development profits will be accounted for under the trading income rules in accordance with GAAP, etc.). The classification of the company for various shareholder reliefs (e.g. entrepreneurs’ relief for CGT purposes, or business property relief for IHT purposes) can be difficult, and each relief has its own special provisions.
Annual investment allowance: a transitional pitfall
The annual investment allowance (AIA) was temporarily increased from £200,000 to £1,000,000, with effect for qualifying expenditure incurred from 1 January 2019. The AIA is expected to revert to £200,000 on 31 December 2020.
Steven Bone pointed out that there are transitional rules for periods straddling the date of reduction. The AIA reduction calculation involves two steps: (a) Time-apportioning the £200,000 and £1,000,000 limits over the whole period; and (b) Restricting the AIA based on actual expenditure incurred in each part of the overall period (i.e. by dividing the period into two notional periods; the actual period start to 31 December 2020; and from 1 January 2021 to the actual period end). Steven pointed out that the transitional period AIA calculations can give rise to unexpected and unfortunate results.
For example, in the case of a company with a year end of 31 March 2021, the result of time-apportioning the £200,000 and £1,000,000 AIA limits over the whole period is £800,000 (i.e. 9/12 x £1,000,000 (1 April to 31 December 2020) plus 3/12 x £200,000 (1 January to 31 March 2021)). However, AIA on the actual plant and machinery incurred in the last three months is restricted to the notional three-month standalone sub-period of £50,000 (i.e. £200,000 x 3 months). Consideration should therefore be given to accelerating major plant and machinery expenditure to before 1 January 2021, if appropriate.
IHT and property valuation
Chris Erwood noted that the determination of the value transferred by a transfer of value for inheritance tax (IHT) purposes depends on when it was made: (a) For lifetime transfers, the value is the ‘loss to the donor’ basis (i.e. the amount by which the total of all assets owned by the donor are reduced as a result of the gift); (b) On death, the value is the standalone market value of the assets at the date of death (but, where appropriate, valued using the ‘related property’ rules).
Market value (as defined in IHTA 1984, s 160) is applied for IHT purposes unless there is another specific valuation provision. Assets held in joint ownership by unrelated persons adhere to the market value rule but with a discount applied to reflect multiple ownership. In the case of land, the discount is likely to vary between 5% and 15%, dependent upon the use to which the property has been applied and whether the co-owners are in co-occupation (Wight v IRC  264 EG 935/82). On the transfer of a standalone asset, a calculation of the value of the estate pre/post transfer must be performed in order to ascertain the transfer value of the gift. In this context, an undivided share of land will be worth less than the appropriate proportion of the entirety, but the actual discounts will vary according to the circumstances (nb the Wight case suggests a discount of up to 15%.
However, the related property rules (IHTA 1984, s 161) will apply to land jointly owned by spouses (or civil partners), with the effect that a discount will be denied a claim (e.g. see Price v HMRC  UKFTT 474).
What is a ‘dwelling’?
David Hannah and Roger Bindschedler pointed out that there is a total of 38 stamp duty land tax (SDLT) reliefs. One of those reliefs is multiple dwellings relief (MDR) (FA 2003, Sch 6B). Unfortunately, ‘dwelling’ is not defined for SDLT purposes. The MDR legislation provides: “A building or part of the building counts as a dwelling if: (a) it is used or suitable for use as a single dwelling; or (b) it is in the process of being used, constructed or adapted for such use” (Sch 6B, para 7(2)).
David and Roger noted that this leads to two questions giving contrary results. Firstly, when does agricultural land become residential land? The answer was effectively upon practical completion of a building capable of being a dwelling. Secondly, when does a building project on commercial land benefit from MDR? This point is currently under challenge, but could be bare land: (a) where architects have been engaged to prepare a planning application or planning has been submitted; (b) where planning has been granted; (c) where ‘mucky brick’ stage has been reached on one or all units. Another point requiring careful consideration relates to a continuous development, i.e. whether a pause in construction whilst a fresh planning application is submitted, or new subcontractors are being sourced, effectively ‘kills’ MDR.
VAT zero-rating for buildings in the course of construction
An update on recent developments in case law dealing with VAT and property was provided by Owain Thomas QC. One such case, Honeygarth Ltd v HMRC  UKFTT 567 (TC) concerned zero-rating in the course of construction.
In that case, the company appealed the disallowance of input tax claimed to have been incurred by it in the course of constructing a building, which related to the first grant allegedly by the company of a residential building in the course of construction. The land and preliminary development works were in fact owned by directors of the appellant company (i.e. husband and wife). There was some evidence that they had assigned an equitable interest in the land to the company, but the only date provided in the documents was after the exchange of contracts for the eventual sale to the developers and in evidence the sale to the company was said to have taken place just before completion.
The First-tier Tribunal noted that the equitable interest in the property must have passed to developers on exchange, and therefore the contractual parties would not have included the company at all. The company could not have acquired an equitable interest in land after that time, so the claim failed. In any event, the tribunal held that for input tax to be related to a zero-rated supply, it had to relate to a building in the course of construction; there was no argument that the building had been completed. Foundations were laid and the concrete poured, but this was not enough because there was at that point no building. Finally, the invoices were all addressed to the directors and not the company. The claim therefore failed for that reason as well. Owain stated that this case was a salutary tale in getting the correct evidence in order.
Furnished holiday lettings and entrepreneurs’ relief
Chris Williams pointed out that furnished holiday lettings (FHLs) meeting certain qualifying criteria are treated as a trade for income tax and corporation tax purposes, as well as some capital gains tax (CGT) reliefs, including entrepreneurs’ relief (ER).
An individual running a business in a single FHL is treated as operating a trade. If the FHL ceases to meet the qualifying criteria for the favourable tax treatment, it ceases to be treated as a trade from that point. However, for ER purposes the individual would have three years in which to dispose of the property for relief to be claimed on the disposal.
What would be the ER position if (say) an individual who owns several qualifying FHLs disposes of one of them? For example, Dolly has three FHL properties. Chris considered that if Dolly sold one FHL, that would be the sale of part of a business, and ER would apply to the disposal.
Property letting businesses: the ‘other’ Ramsay case
Where chargeable assets (eg rental properties) are sold to a ‘connected’ company, the properties are deemed to be transferred at their market value for capital gains tax (CGT) purposes (TCGA 1992, s 17). However, it is often possible to use incorporation relief (under TCGA 1992, s 162) to defer the relevant capital gains. Incorporation relief is capable of extending to rental property businesses, if certain conditions are satisfied.
However, Peter Rayney pointed out that some landlords may be uncertain whether their rental property activities are sufficient to constitute a business. In Ramsay v HMRC  UKUT 0236 (UTT), the Upper Tribunal ruled that activities ordinarily associated with the management of an investment property could be regarded as a business. However, in order to be treated as a business the tribunal held that the activities must: (a) represent a seriously pursued undertaking; (b) be conducted on sound and recognised business principles; and (c) be of the kind commonly made by those who seek to profit by them. Furthermore, the activities must be of a significant nature with a reasonable amount of time being spent on property-related activities.
In Ramsay, the taxpayer had devoted some 20 hours a week managing, maintaining and carrying out the property business related work. The tribunal concluded that the level of activity and taking the activities of the taxpayer ‘in the round’ was sufficient to constitute a business for the purposes of section 162 incorporation relief. In practice, it would clearly help if the property owner(s) had no other employment or trade.