A special commissioner held that the purpose of commercial mortgages taken out by a taxpayer was to purchase a parcel of assets which were the business assets (goodwill, fixtures, stock and premises) associated with a newsagents and shop, and a private dwelling house. The interest paid on the mortgages was to be apportioned accordingly to reflect the mixed private and business use of the commercial mortgages and the appropriate rate of apportionment was 35 per cent private and 65 per cent business use.

Facts

In 1993 the taxpayer retired early with a redundancy payment of £21,000. In 1994 the taxpayer and his wife completed the purchase from M of a dwelling house and adjoining self-contained shop premises. The taxpayer intended to carry on M's trade as a newsagent and shop from the adjoining premises and, as part of the transaction, M purchased the taxpayer's home. The total purchase price for the dwelling house and business was £134,500 which comprised £47,500 for the house, £47,500 for the shop premises, £30,000 goodwill, £5,000 fixtures and fittings and £4,500 for stock.

The taxpayer and his wife funded the purchase price with the market value of their house (£58,000) which was exchanged with M as part of the transaction, a mortgage advance of £67,500 from the building society with the taxpayer meeting from other sources the balance of £9,000 plus professional fees incurred in connection with the purchase. The taxpayer used his redundancy payment to discharge the mortgage on their former home. The building society initially offered to lend the taxpayer £75,000 on a purchase price of £130,000 but that was subsequently reduced to £67,500 to reflect the valuation of the shop premises. The mortgage with the building society was a commercial rather than a residential loan. The taxpayer appealed against amendments to his tax returns for 2000–01 and 2001–02, and against discovery assessments for previous years. In their amendments and discovery assessments the Revenue had reduced by 50 per cent the amount of mortgage interest which the taxpayer had claimed for business expenditure.

The tax payer contended that he had taken out the mortgage with the building society to purchase the assets of an ongoing business. The assets included the shop premises, fixtures and fittings, trading stock and goodwill. Thus the interest payments on the mortgage should be allowed in full when computing his taxable profits under Sch. D. The Revenue submitted that the purpose of the mortgage was to purchase a parcel of assets including a private residence. Thus the interest payments should be apportioned as to 50 per cent each between business use and private use.

Issue

Whether the taxpayer's expenditure on interest payments under the mortgage was applied wholly and exclusively for the purposes of the taxpayer's trade as a newsagent.

Decision

The special commissioner (Michael Tildesley) (allowing the appeal in part) said that, on the facts, the taxpayer had purchased a complete package bearing in mind the taxpayer's individual circumstances at the time of the transaction and the actual mechanics of the deal.

The taxpayer had purchased a business with a dwelling from M. The purpose of the mortgage with the building society was to effect the purchase of M's business with a dwelling by providing the necessary funds to make up the shortfall between the purchase price and the market value of the taxpayer's house. The mortgage was not taken out for the sole purpose of paying for the assets associated with M's business. Accordingly, the purpose of the commercial mortgages taken out by the taxpayer was to purchase a parcel of assets which were the business assets associated with the newsagents and shop and the private dwelling house.

It followed that the purpose of the commercial mortgages entered into by the taxpayer was to purchase a parcel of assets with mixed business and private use. On that basis the Revenue had apportioned the interest paid by the taxpayer on the mortgages equally between business and private use. Their rationale for the 50/50 split between the respective uses was that the value of the properties subject to the mortgage had been assessed identically at £47,500 by the taxpayer's solicitors.

However the commissioner disagreed with the Revenue's view that the commercial mortgages were taken out to purchase the two properties. The taxpayer had taken out the mortgages to meet the shortfall between the purchase price of the business and dwelling and the market value of his old house. Thus their purpose was to facilitate the purchase of the whole package rather than two separate properties. The Revenue had wrongly transposed the security for the mortgages with the purpose for which the mortgages were taken out.

The Revenue accepted that the commissioner had jurisdiction to deal with the issue of apportionment of the mortgage interest. In view of the finding that the purpose of the mortgage was to purchase the whole package, namely the business assets including the shop and the residential property, the apportionment should be based on the value of the residential property against the purchase price of the whole package. The documents produced gave conflicting prices for the whole package. The mortgage application stated a purchase price of £130,000, whilst the completion statement prepared by the taxpayer's solicitors gave £134,500. The figure given by the completion statement was to be preferred. Thus the apportionment for private use was £47,500 divided by £134,500 which gave 35 per cent rounded down. The apportionment for business use was 65 per cent.

(2005) Sp C 511. Decision released 24 November 2005.