In TC05677: Stephen Schechter and another [2017] UKFTT 189 (TC), the UK First-Tier Tribunal (Tax Chamber) ruled, among other issues, on whether two properties owned by the appellants’ company were held as trading stock or capital investments.

The appellants, Stephen and Lawrence Schechter, together with two other family members, own all the shares of a Bahamas company, Vinexsa International Limited (Vinexsa). Vinexsa, in turn, owns two flats in London at 12 Charles Street. Vinexsa is also the sole shareholder of a UK company, Sweet Revenge Limited (Sweet Revenge), which owns a property in France at 20 Chemin de Bellevue.

The UK property at 12 Charles Street was purchased by Vinexsa as Stephen Schechter’s home when he moved to the UK from the USA. Stephen Schechter had been advised to structure the ownership in this manner to avoid any potential liability to UK inheritance tax that would have arisen upon his death if he had held the property in his own name. Stephen Schechter lived in the property while the basement of the property was converted to his office where his work files were stored. Subsequently, he applied for the title to the basement of the property to be separated from the title of the main apartment that he lived in. Separate leases were thereby granted for the two units and the city council also approved of the use of the basement unit as a private office.

The French property at 20 Chemin de Bellevue was purchased for development and was acquired using Sweet Revenge to avoid French succession issues. Another reason for using a UK company to acquire the French property was to enable a sale of the property by selling the company’s shares as this would avoid French registration duties, notarial costs and the pre-emption rights conferred upon the French government which would come into play upon a sale of the property.

Subsequently, for the purpose of obtaining a double tax credit for US taxes which the appellants had paid against French and UK taxes, the appellants were advised by French and UK tax accountants that the companies should declare that they held their assets as nominees for the Vinexsa shareholders, including the appellants. As a result, Vinexsa executed both a declaration of trust and a nominee agreement, stating that it held all its assets on trust for its four individual shareholders.

Separately from the issue of the double tax credit, the appellants sought to deduct losses they had incurred in respect of the London and French properties against their trading income. Such deductions would only be possible if the appellants are the beneficial owners of the said properties and the properties are held as trading stock.

The Tribunal held that the declaration of trust and the nominee agreement were admissible as they were not stamped. However, even if they were stamped, they would not be effective as (i) in the case of the London properties, the trust was a sham and was never respected by Vinexsa and the shareholders and (ii) in the case of the French property, neither the declaration of trust nor the nominee agreement could extend to the property as it was held by Sweet Revenge and not by Vinexsa directly.

As to the issue of whether the properties were held as trading stock, the Tribunal affirmed that there is no statutory definition of “trade” and that this term has to be determined by reference to case law and with assistance from the badges of trade.

Turning first to the London property, the Tribunal was left without a doubt that both flats were held by Vinexsa as capital assets and not trading stock. The flats were acquired in a single transaction to provide a home for Stephen Schecter in London and not as trading stock for a property-dealing trade. Although the title of the flat was split, this was not done with the intention of appropriating the basement to trading stock. On the contrary, the basement continued to be used to store Stephen Schechter’s files and was subsequently rented to Stephen Schechter’s company to be used as an office. The Tribunal also held that the vesting of the beneficial ownership of the flats in the Vinexsa shareholders under the nominee agreement did not appropriate the flats to trading stock.

In relation to the French property, the Tribunal held that the property was indeed acquired for development with a view to realising a profit after the development was completed. Ordinarily, this would be sufficient to demonstrate that Sweet Revenge owned the property as trading stock. However, the Tribunal considered that there was no intention that Sweet Revenge would ever sell the property as this would allow the French government to exercise its pre-emption rights. Instead, it was always the intention that Sweet Revenge would continue to own the property and that Vinexsa would sell the shares of Sweet Revenge to a purchaser. Thus, if any asset was held as trading stock, it would be the shares of Sweet Revenge and not the underlying French property.

Editorial Note

An interesting spin is seen in this case when the Tribunal took the view that a property purchased for development and subsequent sale, which would normally be regarded as a trading asset, would be considered a capital asset instead when its sale is intended, from the outset, to be effected via the sale of shares of its holding company.