In Mr Darius Soleimani-Mafi v HMRC  TC06629 the First Tier Tribunal (FTT) upheld capital gains tax discovery assessments for the disposal of a property on entering into a declaration of trust; no oral trust agreement already existed, there was a disposal on the date of the declaration and the taxpayer deliberately failed to declare the gain.
- For capital gains tax (CGT) under s28 TCGA 1992 the date of disposal and acquisition is the date of exchange of contracts where the contract is unconditional.
- Prior to April 2015 there was no Non-resident capital gains tax on the sale of UK property.
- The transfer of Beneficial ownership under a declaration of trust is a market value disposal for CGT purposes.
In May 2007 Mr Soleimani-Mafi, a UK resident, sold a London property which was jointly owned with a friend, for £1.8million, realising a significant gain.
- The property was acquired 50:50 for £1.25million funded by a mortgage and loans from Mr Mafi and his co-owner. The purchase completed on 19 March 2007 with exchange taking place in December 2006.
- By a document dated 19 March 2007 Mr Mafi declared that he held his 50% share of the property on trust for his sister Mozhgan Soleimani-Mafi (“MSM”) who lived in Tehran. He did not take advice in entering into the document. He considered that the document formalised an oral agreement that the property belonged to his sister.
- He did not declare the gain on his 2006/07 or subsequent returns as he believed the gain was his sisters and was non-taxable as she was a non-resident.
- In 2014 HMRC issued a Discovery assessment under s29 TMA 1970 citing Deliberate behaviour and penalties under s95 TMA for Negligently submitting an incorrect tax return. The original amounts were reduced to £99,454.00 and £34,808 (35% of the tax) respectively.
- HMRC initially assessed the gain on the third party disposal in 2007/08; this was changed to 2006/07 when they became aware of the trust document. Their view was that the trust was an intentional act to avoid paying CGT.
- Mr Mafi appealed.
The FTT dismissed the appeal:
- They agreed that a discovery assessment could be made:
- A relevant fact (the property disposal) was newly discovered by HMRC and
- Mr Mafi did act deliberately in failing to declare the gain; he was a business person who had sold UK properties before and must have been aware of the need to consider the tax implications of property transactions in the UK, and to investigate those implications with his professional advisers.
- It was improbable that any trust existed before the 19 March 2007 document was signed; the evidence suggested it did not and Mr Mafi told the bank that the funds for the purchase came from his own resources.
The decision here is not surprising, there was no evidence that any trust had subsisted on the date the property was acquired. Had the declaration of trust been entered into on or before the date of exchange in 2006 the position would have been different.
Neither HMRC nor the FTT suggested that a property sold less than 6 months after acquisition for a substantial profit should have been subject to income tax as a Transaction in land. This would be surprising were it not for the fact that the rate of CGT in 2006/07 was the same as the higher rate of income tax at 40%, which shows how things have changed!
Useful guides on this topic
How to appeal a tax penalty
Essential reading in cases were there are penalties too
Discovery assessment and time limits
How far HMRC can go back, what conditions must be met for a valid discovery
Penalties: Error in a return or document
How work out penalties for different forms of inaccuracies
DOTAS: Disclosure of Tax Avoidance Schemes
Rules for declaring use of tax schemes