An attempt to claim Entrepreneurs' Relief (ER) on liquidation distributions was denied by the First Tier Tribunal (FTT). It was found that the company in liquidation had never commenced trading. Simply attempting to enhance the value of land acquired before its disposal is not sufficient to amount to trade.
In Mark Stolkin, Margeaux Stolkin and Faye Clements v HMRC [2024] TC09086, distributions received during liquidation did not qualify for Entrepreneurs’ Relief (ER) (now known as Business Asset Disposal Relief, or BADR) because the company was not trading.
- The taxpayers' owned shares in a company, Stolkin Greenford Limited (SGL).
- SGL's only asset was a parcel of land, which included a protected site.
- SGL's original intention, at the time of acquisition, was to maintain the site as an investment.
- After acquisition, the protections over the site were lifted and the site was identified as suitable for mixed-use development.
- SGL changed its plans to maximise value. It sought major planning consents for change of use with a view to its onward sale. SGL appropriated the site to trading stock for accounting purposes in December 2013.
- A third party purchased the site on 18 January 2016.
- SGL entered Members’ voluntary liquidation on 11 March 2016.
- The taxpayers received distributions from SGL between 11 March 2016 and 5 April 2016 and claimed ER on each distribution received, on the basis that SGL commenced trade in December 2013, when the change of intention occurred.
- HMRC disagreed that ER was available, stating that no trade came into existence.
- After undertaking enquiries, HMRC issued Closure notices denying ER, and, in the case of one taxpayer, raised a Discovery assessment for Capital Gains Tax on the basis ER was not available.
- The taxpayers Appealed to the First Tier Tribunal (FTT).
The FTT found that SGL was investing in land rather than Dealing in land. SGL was not a trading company because:
- SGL did not intend to carry out a development or do anything which would make a significant change to the site.
- None of the changes were brought about by SGL itself. The changes in planning status and value came from the unsolicited policy shift and the third-party purchaser.
- SGL had changed its plans, it no longer wished to hold the site as an investment. However, appropriating the site to trading stock cannot have any tax significance if SGL was not carrying on a trade.
- SGL did not have the expertise or funds to carry out the development identified.
- SGL needed to do something more decisive than simply deciding to sell the asset and then do no more than take steps to enhance the asset’s value before the sale.
The FTT concluded that it is not enough to simply ask whether a person is looking to make a profit from a transaction; how that person is looking to make a profit will determine whether a trade is being carried on.
As well as a change of intention, what is newly intended must be something that constitutes trading, and that newly intended activity that can constitute trading must be carried on.
The appeals were dismissed.
Useful guides on this topic
Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of shares or securities in a company
When can you claim Business Asset Disposal Relief (BADR) on a share sale? What is the rate of Business Asset Disposal Relief (Entrepreneurs' Relief)? How do you claim BADR? What case law is there on BADR?
Liquidation
How do you wind up (liquidate) a company? What types of liquidation are there? What are the formalities and the tax consequences of liquidation?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
Discovery assessment
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?
Allowances & rates: Capital Gains Tax (CGT)
What are capital gains? What is Capital Gains Tax (CGT)? What are the Capital Gains Tax rates, bands, reliefs and exemptions?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Profits from dealing in or developing UK land
These rules apply UK Income tax or Corporation tax to all profits from trading in and developing UK land, regardless of your country of residence.
External Links
Mark Stolkin, Margeaux Stolkin and Faye Clements v HMRC [2024] TC 09086
