Tamzin Eyre & Ors v The Commissioners for HMRC [2025] UKFTT 566 (TC)

[2025] UKFTT 00566 (TC)

Case No TC09530

FIRST-TIER TRIBUNAL

TAX CHAMBER

Hearing Heard on: 6 May, 2025

Date Judgment date: 22 May 2025

Taylor House

Appeal reference: TC/2024/02905; TC/2024/02906; TC/2024/02907

CAPITAL GAINS TAX – entrepreneurs’ relief – disposals of shares in a company holding property and seeking planning permission for the re–development of that property into residential and commercial spaces – whether, throughout the period of one year before the disposals, the company in question was a “trading company”, which is to say a company carrying on trading activities whose activities did not include to a substantial extent activities other than trading activities – held that, in taking steps to obtain planning permission, the company was carrying on activities for the purposes of a trade that it was preparing to carry on or with a view to starting a trade and that it was therefore carrying on “trading activities”, as defined, but that its substantial non–trading assets, the fact that its only income was investment income and the fact that a meaningful part of the re–developed property would include commercial space to be let out for investment income meant that its activities included to a substantial extent activities other than trading activities – accordingly, the company was not a “trading company” throughout the relevant period and entrepreneurs’ relief was not available for the disposals – appeals dismissed

Before

TRIBUNAL JUDGE TONY BEARE

MR DUNCAN MCBRIDE

Between

MRS TAMZIN EYREAppellant

MRS ZAYNE MACLEODAppellant

MR CONRAD PHOENIXAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Ms Rebecca Sheldon, of counsel, instructed by Tax Innovations Limited for Appellant

Ms Gemma Truelove, litigator of HM Revenue and Customs’ Solicitor’s Office for Respondents

DECISION

[1]This decision relates to appeals against one assessment and two closure notices in respect of capital gains tax arising on disposals of shares by the Appellants – Ms Tamzin Eyre (“TE”), Mrs Zayne MacLeod (“ZM”) and Mr Conrad Phoenix (“CP”). The amount under appeal in each case is as follows: Appellant Decision under appeal Date of decision Amount under appeal (£) TE Closure notice 7 August 2023 40,020.00 ZM Closure notice 7 August 2023 40,010.00 CP Assessment 23 December 2022 19,443.00

[2]The shares which were the subject of the disposals in question were in a company called Phoenix Spencer Sandbanks Limited (“PSSL” or the “company”). The Appellants consider that the disposals were “qualifying business disposals” for the purposes of Section 169H of the Taxation of Chargeable Gains Act 1992 (the “TCGA”) and therefore qualified for a lower rate of capital gains tax under Chapter 3 of Part 5 of the TCGA (“Chapter 3”). At the time when the disposals occurred, this lower rate of capital gains tax was known as “entrepreneurs’ relief”.

[3]The Respondents consider that the disposals did not meet the conditions necessary to be “qualifying business disposals” and that therefore the disposals were subject to the normal rate of capital gains tax.

[4]The Appellants have taken no issue in relation to the validity of the assessment or the closure notices as a procedural matter. The sole point in issue in this decision is therefore whether the disposals met the conditions necessary to be “qualifying business disposals”.

the facts

[5]There was no disagreement between the parties as to the facts relevant to our decision. Their disagreement related entirely to the manner in which the relevant law applied to the facts.

[6]Nevertheless, we have found it surprisingly difficult to identify the precise facts in this case because of the unsatisfactory nature of the evidence with which we have been provided.

[7]Starting with the witness evidence, it was clear to us at an early stage in the proceedings that no reliance could be placed on CP’s evidence as his witness statement contained a number of obvious errors and it became apparent when he started giving his oral evidence that he had very little knowledge of the company’s activities and had been content to leave the operation of the company to his fellow director and shareholder, Mr Spencer Whitworth (“SW”).

[8]SW was therefore the only witness on whose evidence we could place any reliance but even he was not very clear on the precise timing of the various events in the life of the company.

[9]In addition, the company’s accounts did not inspire confidence. They had not been audited – the company was entitled to an exemption from audit as a result of its size – and they appeared to contradict the evidence of SW in various important respects. For example, we were provided with no information about the activities of the company prior to its acquisition of land at 17–19, 30–32 and 34A Panorama Road, Poole, BH13 7RD (the “Property”) in 2016 other than the fact that:(1) the company had made a loan to an unrelated third party (the “Original Property Owner”) to enable the Original Property Owner to acquire the Property; and

(2) the company had subsequently acquired the Property by way of the discharge of that loan by the Original Property Owner.

[10]Despite the difficulties described above, we set out below the facts so far as we can determine them from the documentary evidence with which we were provided and the testimony of SW and they are our findings of fact for the purposes of the appeals.

[11]The facts are as follows:(1) PSSL was incorporated on 12 December 2011;

(2) all three Appellants were directors of PSSL from incorporation until they resigned on 30 June 2018;

(3) the shares held by each Appellant in PSSL at incorporation were as follows: (a) CP – 100 ordinary A shares (b) TE – 200 ordinary C shares; and (c) ZM – 200 ordinary C shares;

(4) there was a fourth director and shareholder of PSSL at incorporation – SW – who held 100 ordinary B shares and 400 ordinary C shares;

(5) TE and ZM are the daughters of CP and PSSL was established as a joint venture between CP, TE and ZM, on the one hand, and SW, on the other hand. SW’s expertise lay in residential property development whereas CP’s background was in commercial property. Prior to the formation of PSSL, SW and CP had together invested in a number of residential property development joint venture companies, with SW providing the residential property development expertise and being responsible for the day–to–day activities of the relevant companies and CP, as a passive investor, providing working capital to the relevant companies. In each case, the relevant company had obtained planning permission for the development in question and then either carried out the development itself or sold the land to a third party developer with the benefit of the planning permission;

(6) unlike those other special purpose joint venture companies, PSSL was not formed with the intention of owning land or engaging in residential property development itself. Instead, it was incorporated initially in order to provide the loan to the Original Property Owner referred to in paragraph 9 above. The principal amount of that loan, together with accrued interest on the loan, amounted to some £600,000 by June 2016, when the company acquired the Property as described in paragraph 9 above. It is common ground that the activity of making the loan and receiving interest on it was an investment activity on the part of PSSL;

(7) at the same time, PSSL’s wholly–owned subsidiary, Leopold Land Limited (“Leopold”), provided consultancy services to the Original Property Owner in connection with the proposed development;

(8) by June 2016, it was apparent that, as a result of cost–over–runs and sales at lower than anticipated prices, the Original Property Owner was not going to be able to discharge the principal and accrued interest on the loan. Consequently, the parties reached an agreement whereby the Property was transferred by the Original Property Owner to PSSL in satisfaction of the principal and interest which was due to PSSL under the loan;

(9) the Property was recorded in the accounts of PSSL for its accounting periods ending 30 June 2017 (the 2017 AP”) and 30 June 2018 (the “2018 AP”) as “investment property”;

(10) at the time when the Property was acquired by PSSL, the Property was let out for a mixture of commercial and residential use. The ground floor of the main building and the boatyard and café behind the main building were let out to businesses whilst the upstairs of the main building was let out for residential use;

(11) at the time when it acquired the Property, PSSL’s intention was to make a profit by maximising the development potential of the Property. To that end: (a) in addition to acquiring the Property, PSSL purchased an option to acquire land adjacent to the Property at 28 Panorama Road from an unrelated party and applied for planning permission to raise the land on that site with a view to building some semi–detached houses on the site, along with part of the land at the Property. (That planning permission was granted on 9 June 2017 although the option over 28 Panorama Road had expired without being exercised on 10 February 2017;) (b) PSSL granted an option to an unrelated property development company called Fortitudo Limited (“Fortitudo”) over part of the Property; (c) PSSL assisted, and made common purpose with, Fortitudo in a planning application made by Fortitudo on 9 November 2016 for a re–development of the Property along with certain land adjacent to the Property at 34 to 38 Panorama Road; (d) after that planning application was refused on 21 June 2017, PSSL assisted, and made common purpose with, Fortitudo in a second planning application made by Fortitudo on 23 June 2017 in relation to the same site; (e) following the withdrawal of that second planning application on 9 March 2018, PSSL made a joint planning application with an affiliate of Fortitudo, Jacob Carr Homes Limited, on 24 April 2018 in relation to the same site. (That planning application was refused on 14 December 2018;) (f) the planning applications described in paragraphs 11(11)(c) to 11(11)(e) above envisaged that part of the Property following the re–development – SW estimated some 22% – would be let out to commercial tenants at a rent whilst the remainder would be residential and would be sold at a profit; (g) SW’s role in seeking planning permission was crucial in two respects – first because of his extensive experience in the residential property development market and, secondly, because he was the owner and sole director of the company which occupied the commercial area at the Property and therefore he needed to be satisfied with the nature of the re–development as a whole; (h) given the difficulties which were being experienced in obtaining planning permission for the whole of 30 to 38 Panorama Road, PSSL also took advice from its architects on an alternative re–development plan for the Property which was confined to the Property and 34 Panorama Road; and (i) PSSL also looked at acquiring another property but was unable to agree terms with the owner of that property;

(12) a spreadsheet dated 19 June 2017 prepared on behalf of the company postulated that the owners of 30 to 38 Panorama Road would be able to make a gross profit of £2,473,689 on the re–development of those properties, which equated to a profit of 26.6% on the cost of the land and the re–development;

(13) a spreadsheet dated 5 June 2017 prepared on behalf of the company postulated that the owners of the Property and 34 Panorama Road would be able to make a gross profit of £2,299,060 on the re–development of those properties, which equated to a profit of 23.1% on the cost of the land and the re–development;

(14) the following information can be determined from the accounts of the company (although, as we have already observed in paragraph 9 above, we have some misgivings about the reliability of the accounts): (a) the directors’ report for each of the 2017 AP and the 2018 AP stated that the principal activity of the company was property development. No statement as to the company’s principal activity was made in the directors’ report for the 2016 AP; (b) in the 2016 AP, the company made a loss of £480 which was attributable to expenditure on audit and accountancy services; (c) in the 2017 AP, the company made an after–tax profit of £127,897 and that included rental income of £53,790 and administrative expenses of £39,986 of which £1,400 was attributable to expenditure on audit and accountancy services and £14,457 was attributable to legal and professional fees; (d) in the 2018 AP, the company made an after–tax profit of £2,518 and that included rental income of £40,826 and administrative expenses of £22,257 of which £2,500 was attributable to expenditure on audit and accountancy services and £19,649 was attributable to legal and professional fees; (e) the rental income described in paragraphs 11(14)(c) and 11(14)(d) above was the only income derived by PSSL in the 2017 AP and the 2018 AP; (f) in the 2017 AP, the company re–valued the Property from £602,027 to £1,200,000 and the Property remained at that value in the accounts for the 2018 AP; (g) at the end of the 2017 AP, the company had debtors of £281,449 and bank borrowings of £424,383; (h) at the end of the 2018 AP, the company had debtors of £1,329,241 (which included an interest-free loan of £600,000 to an affiliated company called Battered Sole Limited (“BSL”)) and bank borrowings of £1,484,970; and (i) the company wrote down its investment in Leopold from its original cost of £431,253 to nil in its accounts for the 2017 AP;

(15) a breakdown of the legal and professional fees for each of the 2017 AP and the 2018 AP revealed that: (a) all but £300 of the legal and professional fees of £14,457 which were incurred by the company in the 2017 AP were for legal services; and (b) of the legal and professional fees of £19,649 which were incurred by the company in the 2018 AP, £1,793.10 were for architectural and planning services;

(16) the unchallenged evidence of SW was that the rental income derived by PSSL was an insufficient return on the capital which it had invested in the Property and that the company needed to carry out the re–development of the Property in order to earn an acceptable return on that capital;

(17) on 18 June 2018, the company disposed of its shares in Leopold to SW for £1;

(18) on 22 June 2018, the Appellants agreed to sell their shares in PSSL to BSL and completion of the sale occurred on the date of the contract;

(19) on the same day, SW agreed to sell his 100 ordinary B shares and 66 of his 400 C ordinary shares in PSSL to BSL and completion of the sale occurred on the date of the contract;

(20) on 25 June 2018, PSSL borrowed £1,484,970 from a new bank and used most of the proceeds of the loan to repay its existing bank debt of £434,527.58, to make the loan of £600,000 to BSL referred to in paragraph 11(14)(h) above and to make a loan of £300,000 to SW and his wife;

(21) SW subsequently claimed entrepreneurs’ relief in respect of his disposal to BSL and the Respondents have not challenged that claim; and

(22) following the disposals mentioned in paragraphs 11(18) and 11(19) above, the company continued to seek planning permission for its re–development of the Property but no such planning permission has yet been forthcoming. As recently as 5 December 2024, the new head of planning at the relevant council inspected the Property in connection with the latest proposal to re–develop the Property along with 34 Panorama Road. discussion

Introduction

[12]Unless otherwise specified, each reference in this decision to a statutory provision is to a provision in the TCGA.

The relevant law

[13]As we have noted in paragraph 4 above, the only question at issue in each appeal is whether the disposal of shares in PSSL by the relevant Appellant was a “qualifying business disposal” for the purposes of Section 169H.

[14]At the time when the disposals were made, Section 169H(2)(a) provided that the term “qualifying business disposals” included “a material disposal of business assets”.

[15]The latter term was defined in Section 169I, the relevant parts of which were as follows: “(1) There is a material disposal of business assets where –(a) an individual makes a disposal of business assets (see subsection (2)), and

(b) the disposal of business assets is a material disposal (see subsections (3) to (7)). (2) For the purposes of this Chapter a disposal of business assets is – …

(c) a disposal of one or more assets consisting of (or of interests in) shares in or securities of a company … (5) A disposal within paragraph (c) of subsection (2) is a material disposal if condition A, B, C or D is met. (6) Condition A is that, throughout the period of 1 year ending with the date of the disposal – (a) the company is the individual's personal company and is … a trading company …, and (b) the individual is an officer or employee of the company …”.

[16]It is common ground that each of the disposals in this case was a disposal of shares in a company so that it fell within Section 169I(2)(c) and that it was therefore a “disposal of business assets” for the purposes of Section 169I(1)(a). The dispute which has arisen is whether each such disposal was a “material disposal” for the purposes of Section 169I(5) by virtue of satisfying condition A in Section 169I(6).

[17]In relation to condition A, it is common ground that, throughout the period of one year ending with the date of the disposal (the “relevant period”):(1) PSSL was the personal company of each Appellant; and

(2) each Appellant was an officer of PSSL.

[18]However, whereas the Appellants submit that PSSL was a trading company throughout the relevant period, the Respondents submit that it was not.

[19]The definition of “trading company” for the purposes of Section 169I(6)(a) was set out in paragraph 1 of Schedule 7ZA. So far as is relevant to the disposals which are the subject of this decision, this incorporated the definition of “trading company” in Section 165A, the relevant provisions of which were as follows:

“(3). Trading company” means a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities. (4). For the purposes of subsection (3) above “trading activities” means activities carried on by the company – (a). in the course of, or for the purposes of, a trade being carried on by it, (b).

(c) with a view to its … starting to carry on a trade, …”

The issue in dispute

[20]The Respondents have not sought to challenge the company’s status as a “trading company” by arguing that, as a matter of principle, the activity of making a profit from the re–development of a single property cannot amount to a trade. On the contrary, they have accepted that:(1) the activity of making a profit from the re–development of a single property can amount to a trading activity; and

(2) that is the case regardless of whether the person in question re–develops the property itself and then sells the property at a profit or obtains planning permission and sells the property at a profit to a third–party developer at a price reflecting that planning permission has been obtained.

[21]We agree. It is clear from the extensive case law in relation to what amounts to a trading activity as distinct from an investment activity, including the so–called “badges of trade”, that, as a general proposition, the purchase of a single property with a view to profiting from the re–development and sale of that property can be sufficient to amount to a trade.

[22]Instead, the Respondents’ challenge to the company’s status as a “trading company” in this case is founded on two alternative bases.

[23]First, they say that the activities of PSSL during the relevant period were not “trading activities” because they were not activities carried on:(1) in the course of, or for the purposes of, a trade being carried on by it;

(2) for the purposes of a trade that it was preparing to carry on; or

(3) with a view to its starting to carry on a trade.

[24]Secondly, they say that, in any event, even if PSSL did carry on activities falling within one or more of the categories described in paragraph 23 above during the relevant period, its activities during that period also included, to a substantial extent, activities other than activities falling within one or more of those categories. Not carrying out trading activities Activities not in the course of a trade The Respondents’ submissions

Not carrying out trading activities

[25]In support of their first proposition, the Respondents submit that the sole activity of the company during the relevant period was one of property investment. They point to the fact that:(1) the Appellants have provided no evidence that the company bought or sold any other property during the relevant period;

(2) the Property was initially acquired by PSSL as the consideration for the discharge of a loan which had been held by the company as an investment and it too was therefore acquired as an investment;

(3) the Property was described in the accounts of the company for each of the 2017 AP and the 2018 AP as “investment property” and note 1 to the accounts of the company for the 2016 AP alluded to the fact that the Property was held as an investment; and

(4) the only income of the company during the relevant period was the rental income which it derived from the Property. Our conclusion

[26]We agree with the Respondents that the company was not actually carrying on a trade during the relevant period, for the reasons given in paragraphs 25 above. Indeed, we did not understand the Appellants to disagree with that proposition.

[27]However, that does not mean that the activities of the company during the relevant period were not for the purposes of a trade that it was preparing to carry on or with a view to its starting to carry on a trade. Activities not for the purposes of a trade which the company was preparing to carry on or with a view to its starting to carry on a trade The Respondents’ submissions

[28]In that regard, the Respondents accept the general proposition that a property which has initially been acquired as an investment can subsequently be appropriated for use in the course of a trade – see Simmons v Inland Revenue Commissioners

[1980] 1 WLR 1196

at 1199A. However, they say that, in the present case, no such appropriation has yet taken place. Whilst PSSL might have had “a possible future intention to develop” the Property during the relevant period, that amounted to no more than an intention to change the character of the Property at a later date if PSSL began development. They say that, until then, the Property remained an investment asset and therefore, during the relevant period, the activities of the company were not for the purposes of a trade that it was preparing to carry on or with a view to its starting to carry on a trade.

[29]In support of the above argument, the Respondents say that:(1) the seeking of planning permission is not evidence in and of itself of an intention to start a trade because planning permission can also be sought simply to increase the value of the subject property and without any intention of disposing of the subject property at the increased value;

(2) the planning applications in this case were in some cases made by third parties and not the company itself;

(3) the amounts spent by the company on architects and planning consultants in the 2017 AP and the 2018 AP were modest, amounting to only £1,793.10 in aggregate. This is considerably smaller than the amounts of rental income which were received by the company over the relevant period; and

(4) no physical activity in the course of property development took place during the relevant period or, in fact, has taken place at any point thereafter. The mere fact that various planning applications relating to the Property were made and that the company engaged architects and planning consultants to help in that regard is irrelevant because no subsequent re–development has ever taken place.

[30]The Respondents add that the mere fact that SW and CP participated in other joint venture companies which carried out residential property re–development is irrelevant in the present context because each company is a separate legal entity and therefore its tax position, and whether or not its activities amounted to investment or trading, is to be considered in the light of its own activities and not the activities of its affiliates – see Mark Stolkin and others v The Commissioners for His Majesty’s Revenue and Customs

[2024] UKFTT 00160

(“Stolkin”) at paragraphs [107] and [143].

Our conclusion

[31]We do not agree with the Respondents’ proposition that the activities of the company over the relevant period did not include activities for the purposes of a trade that it was preparing to carry on or with a view to its starting to carry on a trade. On the contrary, we think that the agreed facts make it apparent that the activities of the company over the relevant period did include such activities. It is clear that, over the relevant period, the company was taking active steps to progress the re–development of the Property. Those steps were the engagement of architects and planning consultants to draw up plans for the various re–developments as we have described in paragraph 11 above – see paragraphs 11(11) to 11(15) above in particular.

[32]We see nothing in the points set out in paragraph 29 above to gainsay that conclusion.

[33]As regards paragraph 29(1), it is true that, as a general proposition, in addition to being used as a step antecedent to the re–sale of a property at a profit, planning permission can be sought simply to increase the value of a property. However, we fail to see the relevance of that in the present context. The mere fact that PSSL could have been taking steps towards the obtaining of planning permission simply in order to increase the value of the Property and without any view to making a profit from the re–development of the Property is irrelevant in the light of the clear evidence to the effect that that was not its purpose in this case. On the contrary, the evidence shows that PSSL had determined that rental income alone would not produce a sufficient return from the Property and it was trying instead to derive a more acceptable return by facilitating the re–development of the Property.

[34]As regards paragraph 29(2) above, we do not see how it matters that PSSL was not itself the applicant for some of the planning applications. The crucial fact is that it was taking steps itself to make a profit from the re–development of the Property by making common purpose with the relevant applicant and the other landowners. It is worth observing in that context that, although the option over 28 Panorama Road ultimately expired without being exercised, the fact that the company made a successful application for raising the ground on that property so that it could be included within a re–development involving part of the Property is consistent with the conclusion that the company was preparing to carry on a trade.

[35]As regards paragraph 29(3) above, the fact that the expenditure which was incurred by PSSL in seeking to achieve its aim was relatively insubstantial and comfortably exceeded by the rental income which the company was receiving over the same period is also irrelevant. Whilst the quantum of the expenditure and the relationship which that quantum bore to the quantum of the investment income is potentially a relevant factor in considering the Respondents’ second challenge – which we address below – it has no relevance in determining whether the activity which led to the expenditure was for the purposes of a trade which the company was preparing to carry on or was with a view to its starting to carry on a trade.

[36]Finally, as regards paragraph 29(4) above, the mere fact that the company did not actually carry out any re–development over the relevant period and has not done so since then because it has failed to obtain the necessary planning permission does not negate the fact that its purpose was clearly to obtain that planning permission and its activities over the relevant period were in accordance with that purpose. Just because the company was not successful, and has continued to be unsuccessful, in obtaining planning permission for the re–development, so that the re–development has yet to occur, does not mean that the activities which the company undertook during the relevant period with the intention that that planning permission would be secured were not for the purposes of a trade that it was preparing to carry on or with a view to its starting to carry on a trade.

[37]For the reasons set out in paragraphs 31 to 36 above, we have concluded that the Respondents have failed to convince us of their first proposition. In our view, the activities of PSSL over the relevant period included activities for the purposes of a trade that it was preparing to carry on or with a view to its starting to carry on a trade.

[38]It might be said that the above conclusion sits a little uneasily with the conclusion reached by the First–tier Tribunal (the “FTT”) in Stolkin where, on somewhat similar facts, the FTT concluded that the company in question was not a trading company. However, the facts in Stolkin are distinguishable from those in the present case. In particular:(1) in Stolkin, the property in question had been acquired for the purpose of generating rental income and had been held on that basis for some time whereas, in this case, it would seem that, from the time that the company acquired the Property, its intention was to re–develop the Property, a fact emphasised by SW in his evidence and in the statements made in the directors’ reports for AP 2017 and AP 2018 as to the purposes of the company – see paragraph 11(14)(a) above and Stolkin at paragraph [127]; and

(2) in Stolkin, the company in question had not lobbied for the change in planning status which facilitated the re–development – instead, that had been initiated by a change in the designation of the property in question by the Greater London Authority and the London Borough of Ealing – and it had adopted an approach of making a series of successive planning applications with a view to getting incrementally to a point where it had permission to carry out the re–development – see Stolkin at paragraphs [133] and following – whereas, in this case, the company, without relying on any impetus from the planning authorities, repeatedly took steps to facilitate a single planning permission that would enable the re–development of the Property to proceed.

[39]The second point noted above is very relevant in the context of the point made by the Respondents and set out in paragraph 29(1) above, to the effect that, in certain cases, planning permission can be sought merely with the intention of increasing the value of a property and not with a view to profiting from the immediate re–development of the property. In Stolkin, the former appears to have been the case – see Stolkin at paragraph [158].

Post–script

[40]Finally, for completeness, we would add that, whilst the activities of PSSL in this case speak for themselves and we have not reached our conclusion on this point by reference to anything other than the activities of PSSL alone, we do not agree with the Respondents that, in determining the nature of a company’s activities, those activities must always be considered in isolation and without taking any account whatsoever of the activities of the company’s affiliates.

[41]The latter are part of the context in which the company in question has carried out its activities and, as such, appropriate regard should be given to them. That is not to say that a company’s activities which are demonstrably non–trading in nature can be characterised as trading simply because the company has trading affiliates but it does mean that, where the purpose of a company’s activities is unclear or equivocal, the nature of the activities carried on by company’s affiliates might shed some light on how the company’s activities should be characterised.

[42]For instance, in this case, had it been hard to determine from the activities of PSSL alone whether or not those activities were for the purposes of a trade that the company was preparing to carry on or with a view to the company’s starting to carry on a trade, then the fact that SW and CP had previously established a number of joint venture companies for the purposes of carrying out residential property re–development would seem to us to be a relevant factor to take into account in answering that question. That is not to say that the principle that each company is an independent entity for tax purposes can be disregarded. It is simply a recognition of the fact that the nature of a company’s activities needs to be determined in the light of all of the relevant facts and should not be addressed in a vacuum. Substantial non–trading activities Allam

Substantial non–trading activities

[43]In support of their second proposition, the Respondents rely on the decision of the Upper Tribunal (the “UT”) in Dr Assem Allam v The Commissioners for Her Majesty’s Revenue and Customs

[2021] UKUT 291 (TCC)

(“Allam”) another case relating to the availability of entrepreneurs’ relief. In Allam, the issue in dispute was whether the activities of the company in question included, to a substantial extent, activities other than trading activities. Accordingly, the decision is of direct relevance in the context of the Respondents’ second proposition.

[44]We derive the following principles from the decision in Allam:(1) entrepreneurs’ relief should not be available for disposals of shares in companies that have non–trading activities which are of real importance when viewed in the context of the company’s activities as a whole;

(2) although the legislation refers to “activities”, that word is not limited to the active steps which the company in question takes in the furtherance of its business. Even though investments may not require much active management, those investments must nevertheless be taken into account in the application of the test;

(3) the test is a holistic one which is not confined to physical human activity but requires an overall consideration of what it is that the company actually does;

(4) there is no authority in the legislation for using a numerical threshold in construing the phrase “to a substantial extent”. In each case, it is necessary to determine by reference to the facts as a whole whether the non–trading activities of the company are a substantial part of the activities of the company taken as a whole; and

(5) the test is both quantitative and qualitative. It is necessary both to look at the nature of the activities and to measure in some way the extent of those activities.

The parties’ submissions

[45]In Allam, the UT upheld the decision of the FTT in that case to the effect that the company in question had carried on activities during the period relevant to the claim for entrepreneurs’ relief which were, to a substantial extent, not trading activities.

[46]The Respondents submit that the facts in the present case are on all fours with the facts in Allam. In particular, they point out that, during the relevant period:(1) the only income derived by PSSL was rental income;

(2) the quantum of that income was meaningful;

(3) no actual re–development of the Property took place; and

(4) the expenditure in relation to the re–development of the Property was relatively insignificant and that no re–development of the Property has ever taken place.

[47]For their part, the Appellants submit that the facts in the present case are readily distinguishable from those in Allam. They point out that:(1) in Allam, the company in question was primarily concerned with properties acquired for the purposes of obtaining rental income. It was not the case that the company intended to re–develop all of the properties which it owned and merely received rental income while it awaited planning; and

(2) in contrast, in this case, during the relevant period, PSSL was simply a company which was preparing to start its trade of re–development and any non–trading activities were merely incidental in the context of its activities as a whole. This can be seen in: (a) the fact that SW and CP have previously established a number of other joint venture companies in order to develop residential property, none of which were formed in order to derive rental income; (b) the evidence of SW; (c) the statement in the directors’ reports for the 2017 AP and the 2018 AP to the effect that the principal activity of the company was property development; and (d) the active steps which the company took to ensure that planning permission for the re–development was obtained.

Our conclusion

[48]We agree with the Respondents in relation to this second ground of challenge for the following reasons.

[49]First, we consider that some significance should be attached to the fact that, during the relevant period, 100% of the company’s income took the form of rental income and the amount of that rental income was meaningful. The relevant period straddled the 2017 AP and the 2018 AP. The aggregate rental income shown in the accounts for those two accounting periods was £94,616. We accept that the rental income in question was temporary in nature because the company was contemplating the re–development of the Property and we agree with the FTT in Allam that, in applying this test, rental income of that nature should carry less weight than rental income deriving from properties which are not intended to be re–developed and are instead intended to be held long–term for the purpose of deriving rental income. Nevertheless, that does not mean that the income in question can simply be disregarded. The fact remains that the rental income in this case was significant both in absolute terms and as a percentage of the company’s overall income and that needs to be taken into account in assessing the company’s activities holistically.

[50]We would add that, by the end of the relevant period, the company had been receiving the rental income for some two years. As the FTT noted in Allam at first instanceat paragraph [166], “[there] must come a point at which it is appropriate to discount the development activity (or the preparation for it) that has been undertaken in the light of the continued use of the property to derive rental income”. The UT in Allam cited this approach with approval at paragraphs [107] and [108] of its decision.

[51]Secondly, we think that the rental income received by the company during the relevant period should be seen in the light of the activities of the company prior to the relevant period. It is common ground that the company was carrying on investment activities when it made its loan to the Original Property Owner and we have previously concluded that, during the relevant period, even though it was preparing to carry on a trade or to start a trade, the company was not actually carrying on a trade and the Property was still held as an investment, pending the start of the trade. It follows that, ignoring for the moment the fact that the company was preparing to carry on a trade or to start a trade, the company was an investment company throughout the relevant period and always had been an investment company from the time of its incorporation.

[52]Thirdly, although we would not wish to make too much of this, we agree with the Respondents that the limited extent of the expenditure which was incurred by the company during the relevant period in seeking to implement its re–development plans, when that is compared to the quantum of the rental income which it derived during the relevant period, is somewhat unhelpful to the Appellant’s contention that the activities of the company during the relevant period did not comprise non–trading activities to a substantial extent. The test set out in Allam requires us to weigh up, both qualitatively and quantitively, the trading activities, on the one hand, against the non–trading activities, on the other hand. In that context, the relative paucity of the expenditure incurred in carrying on the trading activities in comparison to the quantum of the non–trading income is noteworthy.

[53]Fourthly, we think that, in applying this test, it is not correct to assume that all of the activities relating to the re–development of the Property were trading activities given that a meaningful proportion of the re–developed Property – some 22% of the whole on the estimate of SW – was not earmarked as residential space for sale by the company but was instead intended to be commercial space, to be let out at a rent and thereby generate investment income. Whilst it is conceivable that the company might have sold the commercial space to a willing investor at the same time as it disposed of the residential space, we have been provided with no evidence to the effect that that was the intention. It is therefore perfectly possible that, following the re–development, the company would have continued to hold a significant part of the completed re–development as a long–term investment. That dual purpose to the re–development inevitably affects the extent to which the activities relating to the re–development of the Property should be seen as trading in nature.

[54]Finally, the accounts for the 2017 AP and the 2018 AP, along with the details of the refinancing described in paragraph 11(20) above, reveal that the company had debtors of £281,449 during the relevant period. Even though those debtors were not producing any income, the sums owed were nevertheless significant and they were not being held for trading purposes. The company was therefore carrying on a non–trading activity in holding them. (We would add that, although the refinancing of 25 June 2018 took place a few days after the relevant period and is therefore not strictly relevant to our determination of this issue, the fact that the refinancing led to a significant increase in the level of non–trading debtors to £1,329,241 (including the loan of £600,000 to BSL and the loan of £300,000 to SW and his wife) suggests that the holding of significant non–trading debtors during the relevant period was not an atypical or unusual activity for the company.)

[55]In conclusion, when one stands back and looks at the activities of the company as a whole and asks “what was this company actually doing?”, as the decision in Allam requires us to do, we do not see how it is possible to say that the non–trading activities of the company over the relevant period were not meaningful. On the contrary, for the reasons given above, we think that, adopting the qualitative and quantitative approach set out in Allam, the non–trading activities were a substantial part of the overall activities of the company.

disposition

[56]In the light of the conclusions set out above, we believe that PSSL was not a trading company throughout the period of one year ending with the disposals which have given rise to these appeals. It follows that, in our view, entrepreneurs’ relief was not available in relation to the disposals and the appeals should be dismissed.

Right to apply for permission to appeal

[57]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release Date: 22nd MAY 2025