US Edition
A builder from South London has won a £1m battle with HMRC after being accused of flipping properties without paying tax.
Gary Ives renovated and sold three family homes between 2008 and 2013, but the tax authority said these activities amounted to a trade and therefore the profits should be liable for income tax.
HMRC claimed he owed more than £712,000, plus penalties of over £283,000 – a total of almost £1m.
It put forward a second argument that – if Mr Ives was not carrying on a trade – then capital gains tax should apply.
Homeowners do not have to pay capital gains tax on their main house under “principal private residence” (PPR) relief, but the tax authority believed the properties purchased were not family homes. Had it won this argument, Mr Ives would be charged around £400,000 in capital gains tax and around £160,000 in penalties.
Stephanie Sharpe, of accountancy firm Moore Kingston Smith, said: “HMRC had decided at an early stage that the properties were not lived in by the Ives family or if they had lived there, it was as temporary occupation and not as a family home.
“The HMRC officer seemed to be influenced by the fact that Mr Ives had described his self-employment as ‘builder’ on his tax return, but he mainly undertook plastering and odd job work, not major property renovation.”
Mr Ives told the tribunal that the type of large family house he and his wife wanted was always out of their price range or did not exist, so they set out to create the perfect family home instead.
However, financial difficulties and the desire to live close to family meant the couple sold up shortly after.
“The broad facts are that each purchase was intended to be a permanent home for the family, but circumstances got in the way,” Ms Sharpe added.
In 2008, Mr Ives and his wife bought the first property in Fulham as two flats for £760,000. A large amount of work was needed to make the place hospitable, so Mr Ives and his son moved in soon after completion to start the renovations. His wife remained in their previous property.
However, the renovation was meant to be funded by the proceeds from the sale of this former family home – and when a sale did not come through, the couple ran into financial difficulties.
The couple sold the property as a single dwelling in 2010 for £1.8m and then bought another house in Wandsworth in a partly renovated state. Mr Ives told the tribunal it soon became obvious the purchase was a “disaster”.
Traffic noise and a lack of parking drove them to sell up earlier than intended, he said. They sold it in 2012 for £1.5m, having bought it for £750,000.
A third property – also in Fulham – was much better suited to them, the tribunal heard. They bought it for £1.7m in 2012. However, by the time it was renovated, their adult children had decided to leave Fulham and the couple decided to move in order to be close to them and their grandchildren. They sold it for £3.25m at the end of 2013.
A number of friends and family members gave evidence that the Ives had furnished the properties, as well as holding dinner parties there and hosting guests overnight.
The tribunal concluded that the properties were not purchased with a view to make a profit in the short term, but had been bought as family homes and therefore the transactions were not trading in nature.
It then decided that Mr Ives was using the properties as his residence and therefore no capital gains tax was due.
Jeremy Johnson, of inTax, the firm that instructed Mr Ives’ lawyer, said they had encountered a number of cases like this over the years.
“We have also dealt with cases where HMRC has challenged whether an individual has occupied a property to the extent that private residence relief would be due on any capital gain,” he said. “However, in relation to property, HMRC is frequently also interested in undeclared income or gains on second homes or rental properties.”
He added: “We weren’t overly happy about needing to take this to tribunal, as it was very stressful for our client, but we are pleased that our client got the right result.”
An HMRC spokesman said: “We are reviewing the tribunal’s decision and considering next steps.”