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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: remuneration, etc: loss on sale of property used as a temporary residence by employee

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

Wholly and exclusively test not relevant for capital expenditure

The acquisition or disposal of a property used by an employee will normally be on capital account. The costs of acquisition or disposal and any profit or loss will also be on capital account. It does not matter that the taxpayer can show that the expenditure was necessary in order to attract and/or retain a valuable employee. It does not matter that the property is only intended to be held for a short time. Therefore a deduction from trading profits is denied by S33 Income Tax (Trading and Other Income) Act 2005 in relation to unincorporated businesses and S53 Corporation Tax Act 2009 for companies. For a discussion of the capital/revenue divide in relation to tangible assets such as property, see BIM35400 onwards.

A partnership’s claim to deduct the loss suffered on sale of a property used as a temporary residence by an employee was refused in the case of Owen & Gadsdon v Brock [1951] 32 TC 206.

In that case, the taxpayers were solicitors acting in partnership. One of the partners was anxious to ensure the continued service with the firm of a valued employee. He arranged to have a bungalow built for occupation by the employee, and he also bought a house for occupation by the employee until the bungalow was completed. The partners agreed that the purchase should be a partnership venture. The house was sold at a loss, when, after about 18 months, the employee moved into the bungalow.

The acquisition of the house was dealt with in the private ledger of the partnership under the heading ‘temporary housing account’. The partners’ fixed capital under their partnership articles was not used to pay for the house. The money was obtained out of the partners’ undrawn profits. When the bungalow was purchased, the partners increased their fixed capital by the amount of the cost of it (£1,358) and their capital accounts were adjusted accordingly.

On appeal, the taxpayers claimed that the loss, together with the expenses of purchase and resale of the house, was allowable as a deduction in computing the partnership profits. The Commissioners held that the deduction was inadmissible.

Wynn-Parry J held that the Commissioners’ decision was correct, the purchase and sale of the house being on capital account. The finding of fact that the property had been purchased solely for the purposes of retaining the services of an employee was insufficient to allow a deduction. The expenditure on the bungalow was a capital nature. The argument that the expenditure on the house assumed a revenue character because it was only intended that the house should be held for a very short time, namely, until the bungalow was completed did not displace the capital nature of the transaction.