TC09530 - [2025] UKFTT 00566 (TC)

We agree with the Respondents in relation to this second ground of challenge for the following reasons.

First, we consider that some significance should be attached to the fact that, during the relevant period, 100% of the company’s income took the form of rental income and the amount of that rental income was meaningful. The relevant period straddled the 2017 AP and the 2018 AP. The aggregate rental income shown in the accounts for those two accounting periods was £94,616. We accept that the rental income in question was temporary in nature because the company was contemplating the re–development of the Property and we agree with the FTT in Allam that, in applying this test, rental income of that nature should carry less weight than rental income deriving from properties which are not intended to be re–developed and are instead intended to be held long–term for the purpose of deriving rental income. Nevertheless, that does not mean that the income in question can simply be disregarded. The fact remains that the rental income in this case was significant both in absolute terms and as a percentage of the company’s overall income and that needs to be taken into account in assessing the company’s activities holistically.

We would add that, by the end of the relevant period, the company had been receiving the rental income for some two years. As the FTT noted in Allam at first instanceat paragraph [166], “[there] must come a point at which it is appropriate to discount the development activity (or the preparation for it) that has been undertaken in the light of the continued use of the property to derive rental income”. The UT in Allam cited this approach with approval at paragraphs [107] and [108] of its decision.

Secondly, we think that the rental income received by the company during the relevant period should be seen in the light of the activities of the company prior to the relevant period. It is common ground that the company was carrying on investment activities when it made its loan to the Original Property Owner and we have previously concluded that, during the relevant period, even though it was preparing to carry on a trade or to start a trade, the company was not actually carrying on a trade and the Property was still held as an investment, pending the start of the trade. It follows that, ignoring for the moment the fact that the company was preparing to carry on a trade or to start a trade, the company was an investment company throughout the relevant period and always had been an investment company from the time of its incorporation.

Thirdly, although we would not wish to make too much of this, we agree with the Respondents that the limited extent of the expenditure which was incurred by the company during the relevant period in seeking to implement its re–development plans, when that is compared to the quantum of the rental income which it derived during the relevant period, is somewhat unhelpful to the Appellant’s contention that the activities of the company during the relevant period did not comprise non–trading activities to a substantial extent. The test set out in Allam requires us to weigh up, both qualitatively and quantitively, the trading activities, on the one hand, against the non–trading activities, on the other hand. In that context, the relative paucity of the expenditure incurred in carrying on the trading activities in comparison to the quantum of the non–trading income is noteworthy.

Fourthly, we think that, in applying this test, it is not correct to assume that all of the activities relating to the re–development of the Property were trading activities given that a meaningful proportion of the re–developed Property – some 22% of the whole on the estimate of SW – was not earmarked as residential space for sale by the company but was instead intended to be commercial space, to be let out at a rent and thereby generate investment income. Whilst it is conceivable that the company might have sold the commercial space to a willing investor at the same time as it disposed of the residential space, we have been provided with no evidence to the effect that that was the intention. It is therefore perfectly possible that, following the re–development, the company would have continued to hold a significant part of the completed re–development as a long–term investment. That dual purpose to the re–development inevitably affects the extent to which the activities relating to the re–development of the Property should be seen as trading in nature.

Finally, the accounts for the 2017 AP and the 2018 AP, along with the details of the refinancing described in paragraph 11(20) above, reveal that the company had debtors of £281,449 during the relevant period. Even though those debtors were not producing any income, the sums owed were nevertheless significant and they were not being held for trading purposes. The company was therefore carrying on a non–trading activity in holding them. (We would add that, although the refinancing of 25 June 2018 took place a few days after the relevant period and is therefore not strictly relevant to our determination of this issue, the fact that the refinancing led to a significant increase in the level of non–trading debtors to £1,329,241 (including the loan of £600,000 to BSL and the loan of £300,000 to SW and his wife) suggests that the holding of significant non–trading debtors during the relevant period was not an atypical or unusual activity for the company.)

In conclusion, when one stands back and looks at the activities of the company as a whole and asks “what was this company actually doing?”, as the decision in Allam requires us to do, we do not see how it is possible to say that the non–trading activities of the company over the relevant period were not meaningful. On the contrary, for the reasons given above, we think that, adopting the qualitative and quantitative approach set out in Allam, the non–trading activities were a substantial part of the overall activities of the company.

In the light of the conclusions set out above, we believe that PSSL was not a trading company throughout the period of one year ending with the disposals which have given rise to these appeals. It follows that, in our view, entrepreneurs’ relief was not available in relation to the disposals and the appeals should be dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.