In Mark Carey v HMRC1, the taxpayer successfully claimed share loss relief. In allowing his appeal, the First-tier Tribunal (FTT) concluded that although he had ceased to be UK resident, he had remained ordinarily resident during part of the relevant year.
Mark Carey (the Appellant) had been living and working in the UK and was resident and ordinarily resident in the UK for tax purposes. In January 2011, he took a sabbatical from his employment with Sequel Business Solutions Limited (Sequel) to pursue work in Rwanda.
Subsequently, the Appellant exercised share options which he held in relation to Sequel shares on 7 December 2011. He acquired 1,200 ordinary shares. On 9 December 2011, the Appellant’s employment with Sequel was terminated and Sequel purchased his shares. All of the negotiations were completed remotely from Rwanda through power of attorney as the Appellant was not in the UK.
In his 2011/12 return, the Appellant included a claim for a capital loss of £145,827 on the sale of his shares to be set-off against the corresponding employment income arising in that year, under sections 131 and 132, Income Tax Act 2007. Sections 131 and 132 provide, so far as relevant, as follows:
“131 Share loss relief
- An individual is eligible for relief under this Chapter (“share loss relief”) if–
- the individual incurs an allowable loss for capital gains tax purposes on the disposal of any shares in any tax year (“the year of the loss”), and
- the shares are qualifying shares […]
132 Entitlement to claim
- An individual who is eligible for share loss relief may make a claim for the loss to be deducted in calculating the individual’s net income–
- for the year of the loss,
- for the previous tax year, or
- for both tax years. […]”
Under section 16(3), Taxation of Chargeable Gains Act 1992, any capital gains loss accruing to a person is not an allowable loss unless he is resident or ordinarily resident in the UK. The legislation has since changed such that there is no longer a distinction between resident and ordinarily resident, but the principle of residency and allowable loss remains the same. The Appellant could not utilise his claimed loss unless he was able to demonstrate UK residency.
Establishing residency was particularly difficult for the Appellant as he had claimed a split year treatment in his 2010/11 tax return, relying on what was then extra statutory concession A11. HMRC was of the view that this meant the Appellant had ceased to be ordinarily resident in the UK and he could not therefore argue that in the 2011/12 tax year he was ordinarily resident for the purposes of his capital loss claim. HMRC therefore refused his claim and issued an assessment. The Appellant appealed to the FTT.
The FTT’s decision
The FTT concluded that the Appellant had not ceased to have a voluntary abode in the UK at the time of his departure from the UK. He had agreed with Sequel to take unpaid leave during his sabbatical while he established whether he could make a career in Rwanda. He had retained his shares in Sequel and continued to own a home in the UK.
However, the sale of his shares in Sequel, in December 2011, had the effect of severing the Appellant’s ties to the UK and his employer. The proceeds of sale had assisted the Appellant in setting up a new life in Rwanda and although he retained a home in the UK which he rented, there was sufficient evidence that he was no longer settled in the UK, and in the view of the FTT he was not resident in the UK. However, the FTT concluded that as the Appellant had been ordinarily resident in the UK for part of the relevant tax year, his loss was allowable.
In deciding whether the Appellant was entitled to relief for the capital losses accruing in the year of assessment, the FTT adopted a purposive interpretation of the legislation which allowed relief if a taxpayer was ordinarily resident in the UK during any part of the relevant year of assessment. The FTT said that the Appellant ceased to be UK resident in January 2011, but did not cease to be ordinarily resident in the UK until December 2011.
There is now a statutory non-residence test and the concept of ordinary residence has been abolished which makes the issue of residence and split year treatment clearer for taxpayers. The rules on residence and capital gains tax are nevertheless complicated and cogent factual evidence is likely to be required should residency become an issue with HMRC.
The decision can be read here.