A special commissioner decided that a taxpayer was not entitled to roll-over relief in relation to the sale and replacement of properties let on normal commercial terms to a company owned by the taxpayer and his wife, since the company was not the taxpayer's personal company for the purposes of TCGA 1992, s. 152.

Facts

The issued share capital of the company was 60,000 ordinary shares of 1p each. At all material times 99.87 per cent of the shares (59,932) were held beneficially by another company (‘the holding company’). Of the remaining 68 shares, 53 were held by the taxpayer and his wife jointly and 15 were held by third parties. The issued share capital of the holding company was at all material times 5,008 shares and was held by the taxpayer and his wife. The taxpayer held just over 50 per cent of the shares in the holding company (2,505) and his wife held just less than 50 per cent (2,503). The taxpayer and his wife were the sole directors of the holding company.

The taxpayer and his wife jointly owned farms on which chickens were raised, and feed mills, which supplied chicken feed. The farms and feed mills were let by the taxpayer and his wife to the company on normal commercial terms and the company conducted its trade from the farms and feed mills so let to it. Between 31 March 2001 and 24 October 2002 the taxpayer and his wife sold certain farms and feed mills and acquired replacement properties between 3 April 2001 and 2 December 2002, which they also let to the company on normal commercial terms. The taxpayer claimed roll-over relief for capital gains tax purposes in respect of those transactions.

The taxpayer's claim for roll-over relief in respect of the disposals of the farms and feed mills and the acquisition of the replacement properties was competent only if the company was the taxpayer's personal company’ within Sch. 6, para. 1(2)D. If so, by virtue of s. 157 the trade, which was actually carried on by the company, was treated for the purposes of s. 152 as if it were carried on by the taxpayer. The unchallenged evidence of the taxpayer and his wife was that the taxpayer ran the holding company because he possessed the necessary business expertise with little input from his wife.

Issue

Whether the company was the taxpayer's personal company for the tax years 2000–01, 2001–02 and 2002–03 for the purposes of a roll-over relief claim under s. 152 of TCGA 1992.

Decision

The special commissioner (John Walters QC) (determining the referral accordingly) said that the company was not the taxpayer's personal company for the relevant tax years for the purposes of TCGA 1992, s. 152. All that the taxpayer's case showed was that he could have taken steps to influence the holding company in such a way that it exercised its voting rights in the company in line with the taxpayer's wishes. Whether or not the voting rights in the company were exercisable by the taxpayer for the purposes of the definition of ‘personal company’ in TCGA 1992, Sch. 6, para. 1(2) was not a question of fact, but a mixed question of law and fact. It was necessary to ascertain what, as a matter of construction, the expression ‘voting rights which are exercisable in a company’ connoted for the purposes of the relevant legislation.

There was no relevant distinction in principle, for the purposes of this case, between the voting rights exercisable in a company and possession of shares in or rights over a company. It was far too wide a construction of the expression ‘voting rights which are exercisable in a company’ to hold that it could attribute such rights to any person who was able, as a matter of fact, to exercise voting rights on behalf of another person, whether by a one-stage or a two-stage process.

Such a construction would sever the ties of ownership between the ‘personal company’ and the individual whose ‘personal company’ it was, which was essential in the scheme of roll-over relief. It would also lead to situations where particular voting rights could give entitlement to two, or more, individuals. It was a necessary requirement of qualification for roll-over relief that the assets on the disposal of which the gain to be relieved had accrued should be assets used in a trade carried on by (and therefore owned by), in principle, the individual disposing of the assets (see s. 152(1)).

That was expanded (by s. 157) to cater for the case where the trade was carried on, not by that individual, but by his ‘personal company’. It would be extraordinary and wrong, if the definition of ‘personal company’ were to be construed so as to allow relief in the case of gains accruing on the disposal of assets owned by an individual and used for the purposes of a trade carried on by a company in which that individual had no (or no sufficient) degree of ownership, but over which he, as a matter of fact, exercised influence short of ownership.

It was difficult to understand the rationale of a scheme which allowed relief for assets used in a trade by a company in which the individual concerned had a five per cent voting interest, but did not allow relief where the individual's interest was indirect through a holding company, as in the present case. There was no evidence that the shares in the holding company held by the taxpayer's wife were held by her on a bare trust or as nominee for the taxpayer. Her statement in evidence that she left decisions on how to exercise votes in the holding company to her husband, because of her trust in the taxpayer's expertise, did not amount to evidence that she had no beneficial interest in the shares. In so far as it was indicative at all, it showed the contrary. She trusted that the taxpayer would do the best both for her and for him. That did not amount to an appointment of him as the holding company's representative. But even if it did, and the taxpayer had been properly authorised to act as the holding company's representative, anything he did in that capacity would have been done on behalf of the holding company, and that would not have shown a situation where, for the purposes of Sch. 6, para. 1(2), the voting rights in the company were exercisable by the taxpayer.

(2007) Sp C 587.
Decision released 30 January 2007.