The case of Cooke v. SC Properties Limited is a complex legal battle around taxation and the existence of a partnership. It revolves around two crucial issues:
- Whether a chargeable gain was realised when Mr. Richard Cooke transferred his interest in the property known as Marepond Copse to SC Properties Limited (SCP) and
- Whether SCP incurred a Stamp Duty Land Tax (SDLT) charge upon acquiring the property from Mr. Cooke.
This case illustrates the complex nature of tax law and the importance of proper documentation in establishing the existence of a partnership.
Background
The story begins with Mr. Cooke and his wife’s acquisition of Marepond Farm, including the property in question, in 1989 for approximately £515,000. Over the years, they made various developments on the land, including refurbishing Marepond Farmhouse and converting barns into living spaces.
In 1997, SCP was established as a property development company, jointly owned by the Cookes.
In 2014 SCP entered a Company Voluntary Arrangement (CVA) to manage its debts with creditors. This period is pivotal, as planning permission for the property’s development was granted in September 2014, with an agreed value of £256,794.
The Cookes claimed to have formed the R&E Cooke Partnership (the Partnership) in September 2014 to develop the property, considering it part of the Partnership’s trading stock. However, the existence of the Partnership is disputed.
In January 2015, Close Brothers Property Finance granted a facility of £920,000 to the Cookes to support the property’s development. Significant payments were made from SCP to contractors and suppliers between July 2015 and August 2016, funded by the Cookes’ transfers from their personal account into SCP’s account.
Option Agreement and Elections
In August 2015, an option agreement was reached, granting SCP the right to purchase the property for £830,000 within a year. In January 2016, the Cookes submitted an election under section 161(3) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) to defer any gain arising from the nominal increase in land value. Contracts were exchanged in April 2016 for SCP’s acquisition of the property.
Transfer to SCP and Loan
In June 2016, SCP secured a loan of £1,215,000 from Close Brothers Property Finance to acquire the property from the Cookes. On the same day, £830,000 was credited to the Cookes’ director’s loan account with SCP for the property’s acquisition. Both parties agreed that the property’s value on this date was £1,583,945.
Election under Section 178 ITTOIA
On 31 January 2018, an election was made under section 178 of the Income Tax Trading and Other Income Act 2005 (ITTOIA) regarding the transfer to SCP. This election had the effect of setting the sum realised on the “sale” into the company at nil and deferring any profit realisation until SCP sold the property in March 2017.
Sale of the Property
On 23 March 2017, SCP sold the completed property to a third party for £1,875,000.
Partnership Registration
On 19 February 2019, the Partnership was registered with HMRC.
Issues in Dispute
The core issues in dispute are as follows:
Existence of the Partnership
The central question is whether the Partnership between Mr. and Mrs. Cooke existed at the time of the property transfer and the validity of two Capital Gains Tax (CGT) elections.
SDLT Charge
Whether Stamp Duty Land Tax partnership provisions apply to reduce SCP’s SDLT charge to zero.
CGT Quantum
If HMRC’s position prevails on either issue, the appellants dispute HMRC’s capital gains tax calculation, particularly in terms of additional allowable deductions.
Preliminary Issues
Before delving into these main issues, it’s essential to note some preliminary matters:
- Mrs. Cooke, a member of the alleged partnership, is not a party to the appeal, as her tax affairs are not in dispute.
- Late evidence regarding an election under s 178 ITTOIA 2005 was presented during the hearing, which the Tribunal allowed after an adjournment.
- A witness statement from the Appellants’ advisers was submitted without the witness providing testimony, and the Tribunal decided not to admit it as evidence due to procedural non-compliance.
Relevant Legislation
In this case, several key pieces of legislation are relevant to the determination of chargeable gain and SDLT liability:
S 161(1) TCGA 1992 (Appropriation to and from trading stock): This section deals with the appropriation of an asset for trading purposes, triggering a deemed disposal of the asset at its market value.
S 178(1) ITTOIA 2005 (Sale basis of valuation; election by connected person): This section determines the value of trading stock when sold to a connected person who carries on or intends to carry on a trade, profession, or vocation in the UK.
Schedule 15 Finance Act 2003, paragraphs 18 and 20: These paragraphs outline the calculation of chargeable consideration when a chargeable interest is transferred from a partnership to a connected party. In this case, SCP is considered a connected party for SDLT purposes.
Authorities
The parties referred to specific authorities during the case, including:
- Burnett v Barker EWHC [2021] 03332: This decision was cited for its statements on partnership law.
- Partnership Act 1890, Section 1: This section provides the legal definition of a partnership, stating that a partnership is a relationship between individuals engaged in a common business with the aim of making a profit.
Evidence Presented
During the proceedings, various evidence was presented, including:
- Development Loans and Personal Guarantees:Mr. and Mrs. Cooke entered into development loans and personal guarantees with Close Brothers in January 2015.
- Valuation by Savills: Savills conducted a valuation of the property in February 2015, indicating a market value of £830,000.
- Option Agreement: An Option Agreement was signed in August 2015, granting SCP the right to purchase the property for £830,000.
- Correspondence and Forms to HMRC:There was correspondence and forms sent to HMRC regarding the formation and registration of the Partnership, along with elections under sections 161 and 178 of relevant tax legislation.
- Partnership Accounts and Tax Returns:: Partnership accounts and tax returns for various years, including the year ending 5 April 2017, were presented as evidence.
- Contractual Agreements: Contracts were established between SCP and Mr. and Mrs. Cooke for the development of the property in June 2015.
- District Valuer’s Valuation: The District Valuer provided a valuation of the property in June 2018, valuing it at £1,583,945 as of 5 June 2016.
Financing
Mr. Cooke clarified that SCP had entered into a voluntary arrangement with creditors, making it difficult to secure financing for property development through SCP.
Therefore, he and his wife obtained financing in the name of their partnership from Close Brothers in January 2015. The funds from Close Brothers were transferred as stage payments to their joint personal bank account.
Planning Permission
The original planning application for the property was initially rejected, but an appeal was successful in September 2014, leading to Planning Permission being granted.
Mr. Cooke mentioned that it was only at this point that a decision was made to develop the property, rather than use it as their own residence, which influenced their choice of a commencement date for the Partnership.
The Partnership Business
Mr. Cooke asserted that despite the lack of a formal partnership agreement, the partnership between him and his wife constituted a business enterprise.
They jointly managed the partnership from home, involving project management, design, and significant financial commitments.
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The Elections
Mr. Cooke stated that he relied on his local accounting firm for advice on structuring the property transactions and completing the necessary forms for HMRC. He signed the Partnership tax returns for each year, including forms for registering the Partnership with HMRC in December 2015.
Existence of the Partnership
The pivotal issue in this case is the existence of the Partnership between Mr. and Mrs. Cooke. The tribunal found that Mr. and Mrs. Cooke had failed to demonstrate, to the required legal standard, that a partnership existed between them. Several key reasons were pointed out:
- Lack of Independent Evidence: There was no independent evidence of Mrs. Cooke’s views or involvement in the partnership, casting doubt on the genuine nature of the partnership.
- Lack of Key Attributes: The partnership lacked key attributes that one would expect from a business entity. These included the absence of a separate bank account, VAT registration, invoices, or contracts typically associated with a trading partnership.
- Option Agreement: The Option Agreement granted to SCP, a company connected to Mr. and Mrs. Cooke, suggested that profits would accrue to SCP rather than the partnership, undermining the partnership’s existence.
- Inconsistencies in Statements: There were inconsistencies in Mr. Cooke’s statements regarding the partnership’s start date and other crucial details, further raising doubts about its legitimacy.
As a result, the tribunal concluded that the partnership was more of a planning idea than a legally recognised entity.
CGT Charge
Given that the tribunal found the partnership did not legally exist, the property had not been appropriated to trading stock. Therefore, the property was owned by Mr. and Mrs. Cooke when sold to SCP on 9 June 2016. Consequently, a chargeable gain arose on that sale, with half of it being chargeable to Mr. Cooke.
SDLT Charge
As the partnership was deemed not to exist, the transfer of the property to SCP was subject to SDLT. The tribunal calculated the SDLT charge based on a market value of £1,583,945, resulting in a charge of £151,342.
CGT Quantum
The tribunal rejected the appellants’ claims for additional deductions related to planning permission and land maintenance. They concluded that these expenses should not be included as allowable deductions.
The taxable gain in respect of the property’s disposal amounted to £716,745, with half of it being chargeable to Mr. Cooke.
Costs
The tribunal directed that HMRC had the right to make an application for costs related to the hearing, considering the delay caused by the appellants providing evidence concerning the s 178 election on the day of the first hearing.
Decision
In summary, the tribunal ruled against the appellants, finding that the partnership did not legally exist. This resulted in CGT and SDLT liabilities on the property transactions.
Additionally, the tribunal rejected additional deductions claimed by the appellants, ultimately upholding HMRC’s position on the tax liabilities.
Conclusion
This case serves as a reminder of the importance of proper documentation and compliance with tax laws, particularly when dealing with complex structures like partnerships.
It also highlights the need for consistency in statements and the provision of clear, independent evidence when establishing the existence of a partnership for tax purposes.
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