Stolkin v HM Revenue and Customs

Where a gain on a mixed-use asset qualifies for both EIS relief and taper relief, EIS relief must first be applied to the overall gain on the real asset. Only the balance accruing in the year of assessment is then divided between business and non-business use for taper-relief purposes. The statutory fiction treating those parts as separate gains and separate disposals operates only within the taper-relief provisions. It cannot be used at the EIS stage to allocate relief selectively to the non-business element and preserve the business element for more favourable taper relief.

The taxpayer claimed EIS relief against the non-business elements of gains on two mixed-use properties, seeking to leave the business elements to benefit from higher taper relief. The First-tier Tribunal allowed the claim. The Upper Tribunal allowed HMRC’s appeal in [2013] UKUT 165 (TCC), holding that the taper-relief deeming provisions did not authorise a notional division of a single gain for EIS purposes. The Court of Appeal considered whether the statutory scheme permitted that computation and dismissed the appeal.

1. Appeal dismissed. Lord Justice Floyd delivered the principal judgment. Lord Justice Sales agreed with his reasons.
2. Capital gains tax is charged on chargeable gains accruing in the year of assessment. A valid EIS claim defers the relieved part of the gain, so that it does not accrue in that year. This accords with the approach in Daniels v HMRC [2005] STC 684, namely that EIS relief is applied before taper relief.
3. The deeming provisions in Schedule A1 to the Taxation of Capital Gains Act 1992 are confined to the purposes of taper relief. That follows from section 2A(7), paragraph 1 of Schedule A1, and the statutory context read as a coherent whole. Paragraphs 3 and 9 do not operate generally to divide a real asset into separate assets.
4. For a mixed-use asset, the correct sequence is: calculate the overall gain on the real asset; apply EIS relief; identify the net gain accruing in the year of assessment; divide that net gain between business and non-business use; and then apply the paragraph 3(5) fiction solely to calculate taper relief under section 2A.
5. Paragraph 3(5) does not deem the original disposal to be two separate disposals at the earlier EIS stage. The EIS provisions in Schedule 5B operate on disposals of real assets. Although EIS relief may be claimed against part of a gain, they provide no basis for selectively applying it to notional business and non-business assets. The anomalies identified by the First-tier Tribunal could not overcome the clear statutory scheme.

1. Court of Appeal (Civil Division). The appeal from the Upper Tribunal was dismissed.
2. Upper Tribunal (Tax and Chancery Chamber). HMRC’s appeal from the First-tier Tribunal was allowed in [2013] UKUT 165 (TCC).
3. First-tier Tribunal. The taxpayer’s appeal was allowed in a decision released on 24 November 2011.