In Terrace Hill (Berkeley) Ltd v HMRC TC04282 the FTT considered a finely balanced case as to whether the profits made on the disposal of a property developed for letting amounted to a trading or an investment activity.
- The Terrace Hill group (TH) had expertise in organising property developments while its Joint Venture (JV) partner could obtain finance and conducted a trade in serviced office accommodation. They proposed to demolish and replace a commercial property in Mayfair with high quality office.
- TH treated the acquisition the property as a capital investment on the basis that it was the intention to let the completed property in its entirety to a tenant. The property was treated as capital in the accounts and capital allowances had been claimed and conceded by HMRC.
- Following completion in 2003, a decline in demand meant that the property was actually let to tenants of a lower calibre for lower rentals on leases containing break clauses. By May 2005 it was fully let and subsequently sold in July 2005 when an offer was made which was ‘too good to turn down’.
- TH undertook a capital loss scheme devised by KPMG to mitigate the "gain" on the development profit. Had the gain been treated as trading income the loss scheme would have failed.
HMRC's case
- HMRC argued that TH had always intended to sell their interest in the property once its maximum value had been achieved (completed and fully let) and the profit should be treated as a trading profit rather than capital. The terms of the JV required considered a sale on completion and other minutes of meetings which alluded to a similar intention.
- HMRC claimed substantial penalties for negligence in reporting the sale as a gain rather than trading profit.
The Tribunal reported that they found the case to be ‘finely balanced’. The starting point was considered to be that the presumption is that a developer would hold development sites as trading stock, they accepted that the claimed strategy of seeking to retain developments where rental growth looked highly promising in order to diminish fluctuating results seemed entirely cogent. They therefore found that it was the change in circumstances which led to the change of plan, and confirmed that the property was rightly treated as an investment property, allowing the appeal.
Comment
It's quite rare for property development not to be treated as a trading activity, the combination of accounting treatment and the very particular facts and circumstances seem to have tipped the balance for the company. Given the use of a loss scheme is not difficult to see why HMRC took the case; it lost by a slim margin.