Capital gains tax
Entrepreneurs’ relief and company holding property
The First-tier Tribunal (FTT) has found that a company had substantial non-trading income, so its shares were not eligible for entrepreneurs’ relief (ER, now known as business asset disposal relief) on sale.
Three taxpayers sold shares in a company. They met most of the requirements for ER but HMRC argued that the company was not trading in the year before the disposals. The company held a property and had applied for planning permission to build on adjacent land. The FTT accepted that this meant that the company was intending to trade. However, it found that as the company’s only source of income was substantial rental receipts from the property, which was a non-trading activity, the company’s shares did not meet the qualifying conditions.
Eyre & Ors v HMRC [2025] UKFTT 566 (TC)
From Tax Update June 2025, published by S&W Partners LLP
Entrepreneurs’ relief and provision of moorings
The First-tier Tribunal (FTT) has found that two taxpayers were not eligible for entrepreneurs’ relief (ER, now known as business asset disposal relief), as the company had substantial non-trading activity, but they had not acted carelessly so their appeals against penalties were allowed.
Two taxpayers sold their shareholdings in a company, of which they were both directors, on the same date. They claimed ER to reduce the capital gains tax (CGT) on the sale. HMRC denied their claims, so they appealed to the FTT against this decision and against penalties for carelessness issued alongside it.
The activity was the provision of moorings, along with services and maintenance of boats. The taxpayers argued that very little time was spent on non-trading activities. The FTT, however, noted that a significant proportion of the company’s income was derived from these, such as collecting moorings fees, as opposed to trading activities such as boat repairs. The FTT found that the company was carrying on activities which, to a substantial extent, included non-trading activities and so ER was not available.
On the question of penalties, HMRC argued that the discussions that took place between one taxpayer and his adviser were insufficient from the perspective of a reasonable taxpayer. The absence of formal written advice showed careless behaviour. The FTT found that as oral advice had been obtained from a professional and competent adviser, reasonable care was taken and therefore the appeals against the penalties were allowed.
Moffat v HMRC [2025] UKFTT 663 (TC)
From Tax Update June 2025, published by S&W Partners LLP
Income tax
Rental income found to be taxable on wife only
The First-tier Tribunal (FTT) has found that rental income from a jointly owned property was taxable solely on the wife, as the husband had neither received nor was entitled to the income.
A property was let through the Airbnb platform for three years and the income was not reported. HMRC issued the taxpayer with discovery assessments but chose not to issue penalties due to the circumstances. She argued that the discovery assessments were overstated, as the rental income belonged to both her and her then husband.
The property was jointly owned throughout. The taxpayer let it out by herself, and had the rent paid into a sole account as her husband was overseas and they were not in contact. She held financial power of attorney for him so was able to make decisions alone. The HMRC officer took the position that she needed to prove that her former husband had benefitted from the rental income in order for it to be taxable on them both. The taxpayer pointed out that although none of the funds had been transferred to her husband, she had used them to cover matters for which he should have been responsible, such as joint loans and the upkeep of their child, as he did not give her other financial support. She had to stop paying anything into a joint account as he withdrew funds from it.
The FTT noted that the correct test to determine if her husband was taxable was whether or not he was in receipt of, or beneficially entitled to, the half share of the income. The FTT agreed with HMRC that he was not. It found that the letting business was carried on by the taxpayer alone and it was she who was therefore taxable on its income.
Moss v HMRC [2025] UKFTT 595 (TC)
From Tax Update June 2025, published by S&W Partners LLP
Transactions in securities rules applied to capital reduction
The First-tier Tribunal (FTT) has ruled that the transactions in securities (TIS) rules did apply to a capital reduction and so receipts should be taxed as income not capital.
The taxpayers had inserted a new holding company by way of share for share exchange, creating a large share premium account in the holding company. The company then undertook two large capital reductions, returning funds to the shareholders. HMRC issued counteraction notices against the second of these reductions, arguing the transaction was within the TIS rules and the taxpayers should be subject to income tax on the receipt.
While the taxpayers accepted that one of the main purposes of the transaction was to achieve an income tax advantage (one of the criteria for TIS to apply), they argued that, as it was a return of capital, it did not fall within the TIS rules. The FTT rejected the taxpayers’ argument, stating that the provision the taxpayers were seeking to rely on applied in limited circumstances where share capital could legally be distributed as a dividend. As this was not the case here, TIS applied.
Separately, HMRC argued that the legislation as drafted at the time contained a drafting error. The legislation has since been amended, and after considering the facts and the conditions necessary for the courts to correct a drafting error, the FTT concluded that it did not feel a redrafting was necessary.
As a previous case (Osmond v HMRC [2024] UKFTT 1162 (TC)) found that a drafting error had occurred, we may see the taxpayer appeal this case.
Paul Hunt, James Hunt and Robert Davis v HM Revenue & Customs [2025] UKFTT 538 (TC)
From Tax Update June 2025, published by S&W Partners LLP
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
