In Asif Bhikhi v HMRC [2020] TC7728, the First Tier Tribunal (FTT) held that a property transferred to a relative to raise funds was a chargeable disposal for Capital Gains Tax. There was no evidence that any trust had been created and even if there had, there would still have been a disposal.
Mr Bhikhi was the subject of a confiscation order following a criminal conviction.
- To raise funds to meet the order he sold a property jointly owned with his brother to a company owned by another relative (the purchaser) which took out a mortgage to pay him for the property.
- Two years later the property was transferred back to a company owned by another relative.
- During the period when the property was owned by the purchaser, Mr Bhikhi and his brother continued to treat the property as their own, collecting rents, dealing with maintenance and developing the property by building flats above it.
- The mortgage payments were made out of the rental income with shortfalls being made good.
- The property was shown on the balance sheet of the purchaser which declared and paid tax on the rental profits.
- Mr Bhikhi did not declare a capital gain on the sale of the property. He said that only legal title had been transferred and that he and his brother remained beneficial owners with the purchaser holding the property on an implied/bare trust.
- HMRC raised a discovery assessment on the basis that the transfer was a disposal for Capital Gains Tax (CGT) and charged a penalty for an inaccuracy in a tax return.
The FTT dismissed the appeal and also upheld the penalties charged:
- There was a discovery and the assessment was in time.
- There was an unconditional disposal of the property with no evidence bring produced to displace this. There was a correctly executed contract and legal title had been validly registered in the purchaser's name.
- There was no evidence of any trust, implied or otherwise. The TR1 form has a box for ‘Declaration of trust’ which was not ticked.
- Payment had been made for the transfer of the property and it is not normal for there to be a consideration on a transfer to a trust.
- Even if there were an implied/constructive trust, and the FTT did not actually have the jurisdiction to impose one, this would not help Mr Bhikhi as the settlement of property into a trust is a market value disposal for CGT in its own right.
Transactions amongst family members can be fraught with difficulties when tax advice is not taken and there is a history of a family having a ‘what’s mine is yours’ attitude without formally documenting what has been agreed. It might seem overly formal and expensive to legally document all such transactions but in the long run, it can save a lot of time and money. In this case, as the judge pointed out, a formal trust document may not have helped the tax position.
Links
Discovery assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?
Joint property: legal v beneficial ownership
This practical guide considers the tax rules for joint property and the effect of making joint property elections.
How to calculate a capital gain or loss
This is a guide to how to compute a capital gain (or loss) for individuals and trustees.
UK Trusts
This guide deals with the taxation of UK trusts.
External link
