I am going to talk about a property sale, and no Capital Gains Tax [CGT] was paid. This was a case that came before the Tax Appeals Commission. It’s a very interesting case for people who are interested in the basics of CGT. I’m not saying that there was no CGT liability. This is what the case is about. One side thinks there is none, and the other thinks there is. The tax in question is large at €457,216, which was a CGT liability of €415,651 and a €41,565 surcharge. Let’s delve into the
- Background
- Case for the Taxpayer
- Case for Revenue
- Outcome
- Summary
Background
The taxpayer, we’ll call her Bridget, is resident and domiciled in Ireland. On the 6th of November 2001, she purchased an investment property in Kerry. It wasn’t her home. Based on the Stamp Duty return, the property cost €1,034,838 or IR£815,000. She paid Stamp Duty of €93,135 on the property. Bridget sold the property in 2018 for €2,500,000. She didn’t submit a CGT return in relation to the sale.
Revenue commenced a review into her tax affairs, which escalated into an audit on the 2nd of October 2020. As part of a prompted disclosure, Bridget submitted a tax return Form 11 for 2018. Based on that return, Revenue issued a CGT assessment, which showed a chargeable gain of €0 and a CGT balance owed of €0.
On 3 dates in April 2021, Revenue requested Bridget to provide a CGT computation for 2018. They also wanted any supporting documentation she had. Bridget didn’t submit a computation. On the 27th of May 2021, Revenue issued an amended CGT assessment for €415,651 and a 10% surcharge of €41,565. A total of €457,216. Bridget appealed this assessment to the Commission on the 28th of June 2021.
Case for the Taxpayer
Bridget was represented by her tax agent at the oral hearing, and the agent confirmed
They believed the assessment to be “exaggerated and erroneous” for the following reasons:
- The assessment does not take account any selling costs
- The assessment is based on an estimated purchase price, which is significantly understated
- It doesn’t take into account any costs of acquisition
- It doesn’t take account of enhancement expenditure
- The assessment doesn’t allow for wasting chattels and
- It doesn’t allow for capital losses forward
During the appeal process, Bridget’s tax agent submitted her CGT computation
| Sales Proceeds | €2,500,000 |
| Less Contents | (€70,000) |
| Less Legal Fees | (€20,624) |
| Net Proceeds | €2,409,376 |
| Purchase Price | €1,015,790 |
| Stamp Duty | €91,421 |
| Legal Fees | €12,190 |
| Cost of Acquisition | €1,119,401 |
| Indexed cost of acquisition | €1,216,789 |
| Enhancement Expenditure | €305,000 |
| Gain on Disposal | €887,587 |
| Loss on sale of property UK | (€2,000,000) |
| Loss on sale of property at Padstow | (€240,000) |
| Net Proceeds (Loss) | (€1,352,413) |
| Chargeable Gain | €0 |
Bridget incurred legal fees of €20,624 on the sale of the property and had the statement of costs as evidence. She also had the sales contract, which confirmed that the contents were included in the sale. She gave an estimate of the value of €70,000 and a detailed breakdown for each room in the house. There was no supporting documentation for the costs.
Other costs
Bridget confirmed that she incurred significant costs to the value of €305,000 on improving the property. She confirmed the property was quite run down when she bought it in 2001. She also mentioned that in 2002, she had engaged the services of a designer. This was to assist in the enhancement of the property to include rewiring and replumbing.
The solicitor involved in the purchase of the property had passed away, so she couldn’t get a copy of the invoice. As a result, she estimated legal fees on purchase of 1% of the price, which was €12,190. I’d guess this is 1% plus VAT.
Due to these extra costs and enhancement expenditure, her gain on the disposal was €887,587.
Losses
She argued that this gain was covered by losses she incurred. These losses were
- A €240,000 loss on an investment property in Padstow in Cornwall, and
- A €2,000,000 loss on an investment in the UK
Bridget bought an investment property in Padstow with her brother. When they sold the property, there was a shortfall of €240,000, which she had to repay to the bank that had financed the purchase. There was no documentation submitted in relation to this claim.
Bridget confirmed that she made a €2,000,000 investment through a bank in July 2007. The investment fell into difficulty due to the negative economic position at that time. She submitted an “Investment Performance Review” given to her by the bank in 2013. That showed a nil value of her investment. Her tax agent confirmed that he was unable to get any further supporting documentation from the bank.
There was further evidence submitted that Bridget had invested STG£1,350,000 in July 2007. This was for the purchase of 270 shares at £20 each and 270 Loan Notes at £4,980 each.
Case for Revenue
Revenue confirmed they raised the amended CGT assessment after an investigation and audit. During that time, the taxpayer, Bridget, never made any reference to losses from property investments in the UK. Revenue expects that proper books and records should have been kept in relation to the investment. Their main arguments and beliefs were
- It doesn’t accept that the sale price in 2018 included contents to the value of €70,000. There was no value for the contents in the sales contract. Nor were there receipts or other documentary evidence of the contents. They also mentioned there was no insurance held for the contents of the property.
- They agree on the legal fees at the time of purchase of €12,190 and also agree on the legal fees on the sale of €20,624
- They accept the correct indexation factor of 1.087
- They dispute the claim for enhancement expenditure of €305,000. They didn’t have an issue that some work was needed at the time the property was purchased. But, given that no invoices or other evidence of the extent or cost of the works were produced, it wasn’t possible to put a value on any works done.
- They dispute the claim for capital losses on the sale of the Padstow property. There was no documentary evidence to support that claim.
- Revenue accept that Bridget transferred €2,000,000 to the bank for investing in property in the UK. However, they don’t accept that losses incurred on loan notes are capital losses for CGT.
The Outcome
Before confirming the outcome of the case, the Commissioner confirms that the burden of proof rests with the taxpayer. The duty is on the taxpayer to prove he/she doesn’t owe the tax in dispute. She included an extract from Gilligan J in TJ v Criminal Assets Bureau [2008]
“The whole basis of the Irish taxation system is developed on the premise of self-assessment. In this case, as in any case, the applicant is entitled to professional advice, which he has availed of, and he is the person who is best placed to prepare a computation required for self-assessment on the basis of any income and/or gains that arose within the relevant tax period.”
The Contents
The commissioner ruled on the contents of €70,000. The sales contract included a clause about the contents stating that the contents are included in the purchase price. There is a section that asks “to give the vendor’s estimate of value”. That section was blank, so there was no figure included. While Bridget produced a list of contents at the oral hearing, there were no receipts or other documentary evidence to support the value. Also, there was no list of contents in the sales contract.
The Commissioner found on the balance of probabilities that the
“appellant [taxpayer] has not discharged the burden of proof to establish that contents to the value of €70,000 were included in the sale of the property.”
Enhancement Expenditure
Bridget submitted that she spent €305,000 on enhancement expenditure. She did this soon after buying the property and engaged a designer to help with the upgrade. They gave no evidence to the Commissioner for this expenditure. Nor was there any documentary evidence provided to support the claim.
The Commissioner noted that Bridget could have contacted the designer to provide information. She could also have submitted photographs showing the state of the property at the time she bought it and sold it. Given the lack of oral or documentary evidence, the Commissioner wouldn’t accept the €305,000 deduction for enhancement expenditure.
UK Property Losses
The first UK property loss of €240,000 was on the sale of a property in Padstow that she had with her brother. Bridget submitted that a receiver was appointed to this property investment, and she lost all her investment.
The Commissioner noted that there was
- No evidence in relation to the appointment of a receiver to the property
- No support or evidence of the arrangement she had with her brother for this investment, and
- No information on the address of the property in Padstow, no date for the property purchase, and no date when the loss arose.
Based on the above, the Commissioner didn’t accept the €240,000 loss claim.
The second part of the UK losses claim was that the loan notes were “debts on security.” If they were treated as such, they would be an allowable loss for CGT purposes.
The Commissioner didn’t get a copy of the share certificate or of the loan notes which Bridget acquired following her €2,000,000 investment. There was a bank letter detailing the amounts allocated to shares and to loan notes. There is specific tax legislation in relation to loan notes, which I won’t get into. That’s for fear of getting way too technical and boring you to death!
The crux of the matter is that Bridget argued the loan notes were debts on security, with the resulting losses allowable against her CGT bill. Revenue held the opposite view. While they submitted evidence about shareholder agreements, this wasn’t relevant to the question of the loan notes.
“The Commissioner is left in a vacuum with no relevant information as to the nature of the loan notes which the appellant acquired”
In light of this, Bridget didn’t establish that the loan notes were debts on security, and she cannot use the loss.
The verdict
The verdict is that Revenue win and the tax liability stands, barring some minor changes to the final liability.
The Commissioner noted that Bridget succeeded in her appeal that she had been overcharged. The final liability reduced to €411,811, before the 10% surcharge. The original liability was €415,651, so there was a saving of €3,840. When you add the 10% surcharge of €41,181, her final liability comes to €452,992. This reduction resulted from her identifying some allowable expenses that Revenue didn’t include in their original figures.
Summary
So, a big win for Revenue, and an expensive result for Bridget. Could Bridget have put up a better case and saved herself some more money? I think so. It’s crazy to think that she didn’t claim the auctioneer’s fee on the sale. Even the Commissioner mentioned this. Also, if the shares in the UK investment had a nil value, she could have claimed the losses on those.
She didn’t help her case with the complete lack of evidence. No information or details about enhancement works completed on the property. No photos or no auctioneer to provide a brochure for the sale. If there was a designer involved, why didn’t he/she give evidence? Her brother could have given evidence about the Padstow property. Surely, she could have got some banker to give evidence on the loan notes if she felt they were a genuine debt on a security.
It’s amazing to think that she didn’t return this to Revenue at the time by doing a Form 11 or CG1. And when she had the opportunity to come clean, she still didn’t include the property sale in her return. If she had included the disposal and filed the return on time, she would have at least saved the 10% surcharge. She still owes over €450,000, and that’s before Revenue apply interest. Remember, the tax was due in December 2018 or January 2019, at the latest. So, a property sale and no CGT sounds too good to be true. In Bridget’s case, it was.
But this is not the end of the road for Bridget. She is going to appeal the outcome to the High Court.
Have you sold or are you selling an asset and need help? If so, start here
