A taxpayer who mistakenly believed that no Capital Gains Tax (CGT) would arise when transferring properties to a company owned by his wife was unable to unwind the transaction for CGT purposes. His CGT liability remained. 

  • In Arshad Mahmood v HMRC [2024] TC09056, the taxpayer, Mr Mahmood, transferred ten commercial Properties to a company, RKP, owned by his wife.
  • The disposal, in November 2016, was not reported on Mr Mahmood’s 2016-17 tax return as he believed that:
    • The spousal Capital Gains Tax (CGT) exemption applied.
    • No capital gain arose as the properties were transferred for consideration equal to their CGT base cost.
  • HMRC opened an enquiry. While this was ongoing, in early 2019, Mr Mahmood and RKP agreed to ‘rescind’ the transfer of the properties to RKP, by transferring them back to Mr Mahmood.
    • The basis for this rescission was the mistaken belief by both Mr Mahmood and RKP that the original transfer would not have resulted in a CGT charge.
  • HMRC issued a closure notice in April 2020 assessing Mr Mahmood to CGT on the basis that a capital gain arose on the transfer, based on the Market value of the properties.
  • Mr Mahmood Appealed against HMRC's CGT assessment on the basis that the transfer of the properties had been rescinded in 2019, such that no taxable disposal had taken place in 2016.

The First Tier Tribunal (FTT) found that:

  • A transaction may be void if it is entered into on the basis of a mistaken legal assumption, but only where the mistake affects the subject matter or the performance of the transaction and is sufficiently fundamental.
    • That was not the case here: the liability to CGT had no effect on the terms or subject matter of the transaction nor on how the transaction was performed.
  • A transaction may be rescinded if it has only been partially executed so that one or both parties still have outstanding obligations to perform.
    • In this instance, the transaction between Mr Mahmood and RKP was fully executed: nothing remained to be done.
    • In addition, rescission in such circumstances does not mean that the transfer of the properties could be ignored. It simply puts an end to any further obligations which have yet to be performed.
  • Mr Mahmood and RKP could not rescind the transfer of the properties to RKP on the basis that the transfer was void, owing to their mistaken understanding of its tax consequences.
    • The transfer of the properties by Mr Mahmood to RKL could not be treated as if it had never taken place simply because the transfer was reversed, by RKL transferring the properties back to Mr Mahmood.
    • There was a disposal of the properties for CGT purposes by Mr Mahmood in 2016, at their market value.

Mr Mahmood challenged whether HMRC’s Closure notice validly imposed any tax liability on him. The FTT found that:

  • The closure notice was valid: it stated HMRC’s conclusions, the amendments to be made to the tax return, and the amount of tax which was due as a result of the amendments.
    • This was all that was needed to amend Mr Mahmood’s incorrect tax return and increase his tax due to reflect HMRC’s conclusion.
    • No separate amendment to Mr Mahmood’s 2016-17 tax return was necessary for the additional tax liability to arise.

Useful guides on this topic

CGT: How to calculate a capital gain or loss
How do you calculate a capital gain or loss? What costs are deductible? Can you set losses against capital gains?

CGT: Connected persons
Who is a connected person for Capital Gains Tax (CGT) purposes? Why does this matter? 

Buy-to-let ownership: personal v. company?
What is the most tax-efficient way to own buy-to-let property? Personally or via a company? What are the income and Corporation Tax, CGT, IHT, ATED, SDLT or VAT issues? With tips on profit extraction and other planning points, case studies and links to further guidance.

Incorporation: Property business/Buy-to-let
What relief can I claim if I incorporate my residential property business? What claims and elections do I need to make? What are the Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications?

De-enveloping property
How do you transfer a property held by a company to its shareholders? What is ‘de-enveloping’? How do you avoid excessive tax charges?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

CGT: Date of acquisition or disposal
When is the date of acquisition or disposal of an asset for Capital Gains Tax (CGT) purposes? When do special rules apply? Why does it matter?

External link

Arshad Mahmood v HMRC [2024] TC09056