TRADING STOCK – property acquired as private residence – change of intention to use as trading stock – not demonstrated – error or mistake claim for relief on loan interest payments fails – appeal dismissed.
JOINT OWNERS – property in joint ownership – whether owners assessed for tax in equal shares in respect of the rents derived from letting the property – rental receipts paid to one of the joint owners – other joint owner  surrendered her entitlement to the rents – determination that assessment for tax be against the joint owner in receipt of the rents.

THE SPECIAL COMMISSIONERS

                                 Mr STANLEY E N KINGS	Appellant
      
- and -

	RICHARD L KING 		    Respondent
				(H M INSPECTOR OF TAXES)

                                 Mrs   MARILYN J KINGS	Appellant
      
- and -

	CHRIS BARKER		    Respondent
				(H M INSPECTOR OF TAXES)

			Special Commissioner: Michael Tildesley	

Sitting in London on 26 and 27 November 2003

The Appellants appeared in person

Mr Death for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The Appeal

1.	The Appellants are appealing against the following decisions of the Respondents:

~ The refusal of a claim to error or mistake  relief under section 33 of the Taxes Management Act 1970 covering the tax years 1992-93 to 1995-96 (Appeal 1).

~ Assessments of income tax on income from UK land and property in the following amounts (Appeal 2):

1992-93	£2,880
1993-94	£2,880
1994-95	£2,815
1995-96	£2,880.

~ Discovery assessment for 1996-97  (Appeal 3).

~ Amendments to self assessments as follows (Appeal 4):

1997-98	£3,152.81
1998-99	£3,610.85 

Appeals 1 to 4 relate to Mr Kings.

~ Assessment of income tax on income from UK land and property in the following amounts (Appeal 5):

1996-97	£696
1997-98	£1,300
1998-99	£108

Appeal 5 relates to Mrs Kings

2.	At a preliminary hearing Mrs Kings consented for her appeal to be heard before the Special Commissioners.  A direction was  made by the Special Commissioner to consolidate the appeals of Mr and Mrs Kings and hear them together.

The Issues

3.	Mr Kings was involved in the business of renovating houses and selling them on at a profit. In 1989/1990 he experienced financial difficulties due to the recession in the housing market and rising interests rates. Mr and Mrs Kings decided to move out of their private residence, 19 Hillside Way, and  live in  24 Harborough Road North, which at the time was being renovated for sale. Initially 19 Hillside Way was put on the market for sale but after not finding a buyer the house was rented to tenants. Mr and Mrs Kings took out a new mortgage from the Leeds and Holbeck Building Society secured against 19 Hillside Way  enabling them to discharge Mr Kings’ overdraft with the Midland Bank. 

The principal issues to be decided are:

•	Whether the property at 19 Hillside Way became part of the trading stock of Mr Kings’ business. If yes the interest paid on the Leeds and Holbeck mortgage secured on the property is an allowable expense of his trade. If no, only a proportion of the interest is allowable against the rental income.

•	Whether the rental receipts from 19 Hillside Way should be charged to tax on Mr Kings alone or shared equally between Mr and Mrs Kings.

4.	The  issues  specific to the Appeals are as follows:

•	Appeal 1

The error or mistake claim concerns the interest paid on the mortgage with the Leeds and Holbeck Building Society in the tax years 1992/93 to 1995/96. The matter in dispute is whether the interest payments qualify for relief in Mr Kings’ trading accounts. In order for them to qualify, 19 Hillside Way must become part of the trading stock  of Mr Kings’ business.

•	Appeal 2

This Appeal relates to the rents received from 19 Hillside Way between 1992/93 to 1995/96. The first question  is  whether Mr Kings is assessable for tax alone  on the whole of the rents received or whether the assessment should be shared equally between Mr and Mrs Kings. The second question is what, if any, loan interest relief is available against the rental income. 

•	Appeal 3

This relates to a discovery assessment for tax against the rents received for 19 Hillside Way in 1996/97. The assessment also includes tax charged on pension income (£385) which is not in dispute.

•	Appeal 4

This relates to the Respondents’ amendments to Mr Kings’ self assessments for tax for the tax years 1997/98 and 1998/99. The matters in dispute concern the tax charged on the rental income and loan interest relief in relation to the property at 19 Hillside Way.

•	Appeal 5

This Appeal relates to whether Mrs Kings is chargeable to tax on a 50% share of the rental receipts from  19 Hillside Way between 1996-97 to 1998-99. 

The Evidence

5.	Mr and Mrs Kings gave evidence before me. Three bundles of documents were presented in evidence plus Mr Kings’ bank statements and cash book.

6.	Mr Kings was a partner in an engineering business for 20 years. The partnership ended in 1985 when he was bought out by his partner for £45,000. On 7 February 1985 Mr Kings started work with “Safetymate” as a salesman. He did not find this employment satisfactory particularly working anti-social hours. Mr Kings, therefore, decided to find gainful work  which would not take him away from  his family in the evenings and at weekends. He embarked upon a house renovation business with the capital he acquired from the dissolution of the partnership. 

7.	Mr Kings’ strategy was to buy bungalows which required modest alterations, such as redecoration, new kitchen and bathroom. On 14 May 1985 Mr Kings bought a bungalow at 1 Bishops Drive for the sum of £20,050 which was renovated and resold for £32,000 yielding a profit of £6,413.  On 24 January 1986 he purchased 35 Canons Walk for £18,500 which was sold for £34,500 producing a profit of £5,720.27. Bretton Close was purchased on 3 July 1986 for £27,001 and sold for £38,500 with a profit of £2,317.54. Mr Kings then bought Bilbury Crescent for £24,000 on 17 November 1986 which he sold for £38,950 with a profit of £7,555.54. On 27 April 1987 37 Whitelands Road was acquired for £31,000, reselling at £45,900 yielding a profit of £9,832.29.  On 4 June 1987 Mr Kings purchased 42 Greenhills Road for £32,500 which he sold on for £50,750 at a profit of £7,387.62. During this period of two years Mr Kings  bought six properties which yielded a total profit of £39,224. He spent £26,008 on renovating the six properties. The average renovation  cost per property was  £4,335.

8.	By the end of 1987 Mr Kings was finding suitable properties hard to come by. He took employment with Warley Painters from 12 November 1987 to 31 December 1987 to keep his head above water. On the 2 February 1988 Mr Kings purchased 24 Harborough Road North for £42,500 which was by far his most ambitious project. The property was in total disrepair and needed underpinning before the renovation could start.  Mr Kings intended to convert it from a bungalow to a dormer bungalow with two bedrooms upstairs which  required Mr Kings “to rip  the property to pieces   just leaving  the external walls in place”.  

9.	Mrs Kings, in the meantime, had been working as a team leader/ secretary for the Nationwide Building Society. She started her employment  in 1986  and remained there until 1992 when she was made redundant.  On 4 July 1988 Mr and  Mrs Kings bought 19 Hillside Way as their private residence for £87,000. The purchase was funded with £63,000 equity from their former home at 18 Barnstable Close and a £24,000 mortgage from the Nationwide Building Society. The house was owned jointly between Mr and Mrs Kings.

10.	Mr Kings’ business, however, was starting to experience difficulties. He was allowed  an overdraft facility of £75,000 with the Midland Bank to complete the project on 24 Harborough Road. However, the project was taking longer than originally anticipated because of the subsidence problem. Also the interest charges on the overdraft had increased considerably from 4.5% to 15%. Mr Kings was paying charges of 4% above the base rate. The overdraft stood at £55,506. 64 on 1 January 1989  reaching £84,828.08 by the end of 1989. Mr Kings stopped employing casual labour on the conversion of 24 Harborough Road and tried to do all the work himself. In May 1989 Mr and Mrs Kings put their home, 19 Hillside Way, on the market for £175,000. In June 1989 the asking price for the house  dropped from £165,000 to £150,000 and thereafter to £140,000. However, the housing market was flat. The property itself was in need of renovation and its warm air central heating system was perceived to be a disadvantage in a sluggish market. The option of selling 24 Harborough Road North was not viable because the renovation work had not been completed.

11.	  In August 1989 Mr Kings was called into the Midland Bank to discuss his overdraft. The Bank Manager advised Mr Kings that he was under pressure from Head Office to control strictly loans secured against property because of the fall in the housing market and the unprecedented interest rises. Mr Kings offered the equity in Hillside Way as additional security but the Bank Manager was reluctant to take a second charge on the property and  more interested in the shares (£18,000) owned by Mr Kings. He did not want  to give up the shares because they were “a sort of pension for old age”.   To relieve some of the financial pressures Mr Kings took employment with Persimmon Homes on 1 September 1989 using his wages  to pay the  charges on the overdraft. Towards the end of 1989 Mr Kings deposited a share certificate to the approximate value of £5,000 with the Midland Bank as security.  Mr Kings also in 1989 started business as a kitchen equipment dealer which effectively ceased in 1991, although a claim for a trade loss in connection with this business was made in his accounts ending 31 October 1993.

12.	Mr and Mrs Kings decided to seek the advice of a Financial Adviser from Market Square Financial Services, Towcester. They were advised to rent out Hillside Way and obtain an £80,000 mortgage from the Abbey National on the equity of the property.  The anticipated rent would pay for the interest charges on the mortgage which would repay the overdraft. Mr and Mrs Kings considered this to be the best option because it would maintain the status quo until the expected upturn in house prices.  However, they  did not find this to be easy decision to make, particularly as they had a ten year old daughter at the time. 19 Hillside Way was a much bigger house and the renovation work on 24 Harborough Road was not complete.  

13.	Countrywide Residential found  tenants (Mr and Mrs Potter) on a shorthold assured tenancy for 19 Hillside Way. The Nationwide Building Society, the mortgagor for the property, consented to the  tenancy  which commenced on 1 March 1990 when Mr and Mrs Kings moved into 24 Harborough Road North.  Mrs Kings informed the utilities, the bank, the local authority, Inland Revenue, doctors and employers of the change of address.

14.	The securing of the mortgage from the Abbey National on 19 Hillside Way was proving problematical. Although Mr and Mrs Kings got to the point of a mortgage offer, they were unable to meet  the Abbey National’s criterion about  last two years trading. Later on in 1990 Market Square Financial Services brokered a mortgage with the Leeds and Holbeck Building Society for £95,000. This was achieved with the help of John Strange, Accountants, who provided evidence of projected annual earnings of £28,000 for Mr Kings. The earnings were based on the rental receipts for 19 Hillside Way and Mr Kings’ income from the subcontract work with Persimmon Homes. In December 1990 Mr and Mrs Kings realised that the £95,000 would not discharge the overdraft with the Midland Bank, so Mrs Kings secured an additional advance of £6,000 on the Nationwide Mortgage which was transferred to 24 Harborough Road North.

15.	On the 9 January 1991 Frank Jones & Harley, solicitors for Mr and Mrs Kings received £94,995 from Leeds and Holbeck Building Society, split between two accounts in the respective sums of £28,500 and £66,495, and £30,000 from the Nationwide Building Society. The existing mortgage in the sum of £23,003 with the  Nationwide Building Society secured on 19 Hillside Way was redeemed. This left a balance of £100,953. 67 after deduction of legal fees which was transferred into Mr Kings’ account with the Midland Bank. On 11 January 1991 Mr Roberts, Corporate Banking Manager for the Midland Bank, acknowledged receipt of the £100,953.67 and advised Mr Kings that the overdraft facility had been cancelled and the bank had surrendered the deeds for 24 Harborough Road North.  Mr Kings was also invited to contact Mr Randle, the Enterprise Manager at the Kingsthorpe Branch to discuss his ongoing needs.

16.	The mortgage with the Leeds and Holbeck Building Society was secured on 19 Hillside Way. The repayment period was 25 years. The mortgage was interest only at a variable rate, although the rate of interest was set at 1% above the normal rate. The amount of advance in the mortgage included an amount of £28,500 by way of excess advance referred to as the “deferred account”.  Under the terms of the mortgage the Society suspended payment or interest thereon in respect of the “deferred account”   during the first two years of the mortgage. The £30,000 mortgage with the Nationwide Building Society was secured against 24 Harborough Road North.  

17.	19 Hillside Way remained for sale until the summer of 1991. The bundle of documents contained an advert of Taylors Estate Agents dated 25 April 1991 which advertised  a sale price of £130,000 for 19 Hillside Way. In the meantime the first tenants, Mr and Mrs Potter vacated the property overnight in early November 1990.  At which time Field Lettings took over responsibility for handling the letting of 19 Hillside Way. On 1 December 1990 Mr and Mrs Hughes became the new tenants paying £500 a month in rent. Sometime in 1991 Mr Kings assumed  responsibility for managing the tenancy. A new agreement was struck with Mr and Mrs Hughes dated 20 December 1991 which  turned out  to be invalid. The tenancy of Mr and  Mrs Hughes proved very troublesome to Mr and Mrs Kings. Mr and Mrs Hughes acquired sitting tenants’ rights. The neighbours of 19 Hillside Way complained to Mr  Kings about  nuisances allegedly committed by Mr and Mrs Hughes. Mr Kings experienced delays with the payment of rent and encountered considerable difficulties in entering the property to carry out improvements. Mr and Mrs Hughes vacated 19 Hillside Way of their own accord  on 30 August 1998 just prior to the court hearing brought by Mr Kings for possession of the property. In view of their experiences, Mr and Mrs Kings declined to take on further tenants and eventually sold 19 Hillside Way on 28 July 2000 for the sum of £145,000.  

18.	Between 1989 – 1999 Mr Kings carried out a range of improvements to 19 Hillside Way which cost £14,901 in materials. The schedule of works were as follows:

Year of Work	Description of the Works	Cost of Materials (to the nearest £)	
1989	Fit new kitchen	3,800	
1989	Fit new bathroom suite and toilet	650	
1989	Fit dado rail/skirting and cornices to lounge	110	
1989	Artexing ceilings – whole house	475	
1990	Removal of rear window in lounge –replace patio door	375	
1990	Fit louvred window boards	750	
1990	Wrought iron balustrade on flat roof	240	
1990	New boiler fitted	1,065	
1990	Rebuild garden wall by garage	78	
1990	Pull out old flower bed bricks and lay to lawn	280	
1991	Renew flue to heater	18	
1991	New flat roof	1,600	
1991	Fitting wall lights annex	68	
1995	Front elevation –pitched roof	485	
1995	Rewire lights	79	
1997	Renewal facia boards	103	
1997	Renew bird trap on soil pipe	29	
1998	Renewal of window catches/stays	19	
1998	Replace all internal doors	240	
1998	Replace all door furniture 	91	
1998	Taps/plumbing equipment en suite	148	
1998	Wiring of en suite	450	
1999	Central heating	2,250	
1999	Knock out airing cupboard and build en  suite, sink, shower & shower cubicle	1,500	
	Total	14,901	

19.	Mr Kings said he financed the improvements with a £5,000 overdraft facility with the Midland Bank and with other funds which were paid into his account with the Midland Bank. The bank statements revealed the following credit entries:

Date	Credit Entry	
4.3.1991	£1,837.62 	
13.8.1991	£14,000 capital invested in business	
26.7.1996	£10,375 (£10,000 invested by Mrs Kings by advance on the Nationwide mortgage on Harborough Road North.	
27.11.1996	£4,616.04 (lump sum pension from Sun Alliance of £3,941.25)	

20.	The rent received from the letting of 19 Hillside Way was paid into Mr Kings’ account with the Midland Bank. Mr Kings paid the monthly sum for the mortgage with the Leeds and Holbeck Building Society by standing order from his business account. 

21.	Mrs Kings kept the books for Mr Kings’ business as “he was not au fait with paper work”. She recorded the details of Mr Kings’ income and expenditure in a “Simplex” book from April 1981 to March 1992 and thereafter on a computer spreadsheet. The books were forwarded annually to Mr Kings’ Accountants to enable them to prepare the accounts for submission to Inland Revenue.

22.	On the page headed 1988/1989 in the “Simplex book” there were three “post it notes” addressed to John, ( John Strange of Smith Starmer and Hart, Mr Kings’ Accountants). The note relating to the Leeds and Holbeck mortgage read:

“Mortgage Leeds and Holbeck mortgage on 18 Hillside Way a/c 3330547600 is not MIRAS eligible. The loan is for £67,265,000 advanced 9 January  1991. Interest charged 31.12.91 £8,831.88. Monthly payments:

£858.01 – June
£774.59 – September
£718.56 – November
£693.36 – December onwards

This is partly catered for by the renting out of the property due to the climate we cannot sell at £450 per month. New advance 9.1.91 at £28,500, interest charged £3,742.05, a/c no 3330547611, again Leeds & Holbeck”.

23.	Mr Kings’ Accountants, Smith Starmer and Hart, submitted his income and expenditure accounts to the Inland Revenue. In the years ending 31 October 1988 and 1989 bank charges and interest were declared as expenses. In the year ended 31 October 1990, the income from rental receipts for 19 Hillside Way was not declared and there was no deduction claimed in respect of bank charges and interest. Also the October 1990 statement referred to the transfer of work in progress to own use to the value of £96,160. This entry referred to the transfer of 24 Harborough Road North from Mr Kings’ business. There was no entry in the October 1990 statement transferring 19 Hillside Way into Mr Kings’ business.  The income and expenditure accounts submitted for the years ending 31 October 1991 to 31 October 1994 made no reference to the rental income and deductions in respect of loan charges and interest. The 1994 return was submitted by Moore Stephens, Chartered Accountants, which had taken over Smith Starmer and Hart.

24.	After a period of time it became apparent to Mr Kings that a mistake must have occurred with his accounts following a significant increase in his tax liability. He discovered that his accountants had not claimed the interest on the Leeds and Holbeck mortgage as an allowable expense. Mr Kings attempted to contact Mr Strange but discovered that he had retired with a golden handshake.  Mr Kings was not satisfied with the service provided by Mr Strange’s former firm, so in 1996 he engaged another Accountant, Mr David Smith, to look after his tax affairs.  On 18 September 1996 Mr Smith submitted Mr Kings’ accounts for the year ending 31 October 1995 to the Inland Revenue. Within that letter he disclosed the receipt of rental income in respect of 19 Hillside Way. This letter was the beginningt of the  dispute between Mr and Mrs Kings and Inland Revenue which has carried on for seven years.

25.	 Mr Smith made a mistake about the Nationwide mortgage secured against 24 Harborough Road North which led to an investigation by the Inland Revenue about whether Mr and Mrs Kings were entitled to MIRAS on the mortgage.  Fortunately this matter has now been resolved, Inland Revenue have accepted that Mr and Mrs Kings were entitled to the relief offered by MIRAS on the Nationwide mortgage. Mr Smith also asked the Inland Revenue to share the tax liability for the rental receipts of 19 Hillside Way equally between Mr and Mrs Kings. They  claim that Mr Smith did not have their authority to make that request.

26.	On 23 February 1998 Mr Smith  on behalf of Mr and Mrs Kings made an error or mistake relief claim under section 33 of the Taxes Management Act 1970. The claim was that the interest payments connected with the Leeds and Holbeck mortgage  should be allowed as a deduction in Mr Kings’ trading accounts for the tax years 1992/93 to 1995/96. In addition the claim included the interest paid on the Nationwide Building Society mortgage then secured against 19 Hillside Way for the period following the letting. The  claim was refused  on 15 November 2000 by R Golding, an officer duly authorised by the Inland Revenue. His reason for refusing the claim was that the interest was not paid wholly and exclusively for the purposes of Mr Kings’ trade and accordingly Mr Kings was not entitled to deduct the interest from profits by virtue of section 74 (1) (a) Income and Corporation Taxes Act 1988 (hereinafter referred to as the 1988 Act).  

27.	In the seven years following Mr Smith’s letter of 18 September 1996  over  300 items of correspondence have been exchanged between the parties. The Appellants’ Member of Parliament has been representations on their behalf to Inland Revenue. Several meetings have been held between Inland Revenue officers and Mr and Mrs Kings to resolve the dispute.  Inland Revenue has carried out a  thorough investigation of Mr Kings’ complaint about his treatment. Mr Kings has engaged two other firms of accountants since he parted with Mr Smith.  

Authorities

28.	I was referred to the following authorities:

	Harvey v Caulcott (1952) 33 TC 159
	Marson v Morton  [1986] 59 TC 381	
Simmons v IRC [1980] 2 All ER 798 [1980] STC 350, 53 TC 461, HL
	Taylor v Good  [1973] 49 TC 277, CA

	I was also referred to the following decisions of the Special Commissioners:
	
	Silk v Fletcher [1999] STC (SCD) 220
	Silk v Fletcher(No.2) [2000] STC (SCD) 565

Determination of the Issues

Should the interest paid on the mortgage with the Leeds and Holbeck Building Society  be allowed in full as a business expense?

29.	The legislation concerning allowable deductions is contained in section 74(1) of the 1988 Act, the relevant parts of which provide:

	“74(1)	Subject to the provisions of the Tax Acts, in computing the amount of profits to be charged under Case I  or Case II of Schedule D, no sum shall be deducted in respect of:

(a)	any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocations;
(b)	any disbursements or expenses of maintenance of the parties, their families or establishments, or any sums expended for any other domestic or private purposes distinct from the purposes of the trade, profession or vocation; ….”.

30.	The Respondents accepted that the interest paid by Mr Kings on the overdraft with the Midland Bank up and until 28 February 1990 was allowable in full as a business expense because the overdraft was funding the renovation works at 24 Harborough Road North. Thus the interest was applied wholly and exclusively for the purposes of Mr Kings’ trade as a property developer in accordance with section 74(1) of the 1988 Act.  On the 28 February 1990 Mr and Mrs Kings moved out of 19 Hillside Way into 24 Harborough Road North. From that point in time the Respondents contended that the interest paid on the overdraft with the Midland Bank and then subsequently on the Leeds and Holbeck Building Society mortgage was not  applied wholly and exclusively for the purposes of Mr Kings’ trade as a property developer. Therefore, the interest paid did not qualify for deduction as a business expense  under Case I of  Schedule D.

31.	Mr Death illustrated the Respondents’ contention by referring to Mr Kings’ accounts for the year ending 31 October 1989 submitted by his Accountants, Smith Starmer and  Hart. Those accounts showed a figure of £96,160 for works in progress which was made up of:

Purchases y/e 31.10.88	£47,000
Renovation costs		£34,405
Cost of Sales			£  9,500
Works in progress		£96,160    

Mr Death, then drew up an approximate balance sheet for Mr Kings’ business as at 28 February 1990 (no actual balance sheet was prepared):

Work in progress		£96,160
Bank overdraft		(85,937)
Net Assets			£10,223

The capital account for Mr Kings’ business as at 28 February 1990, therefore, stood at £10,223. From the approximate balance sheet it is clear that the bank overdraft was funding the work in progress with the interest on the overdraft  applied wholly and exclusively for the purposes of Mr Kings’ trade. On 1 March 1990 Mr and Mrs Kings moved into 24  Harborough Road and the property ceased to be a trade asset. The accounts for the year ending 31 October 1990 showed that 24  Harborough Road was transferred out of Mr Kings’ accounts at cost, which was not in dispute.   This would result in the balance sheet for  Mr Kings’ business as at 1 March 1990 containing only the bank overdraft and the capital account leaving him with an overdrawn capital account of  £75, 714 ( £85,937 - £10,223). Thus, according to Mr Death, Mr Kings had taken more out of the business than it has earned, the bank overdraft was now funding his private drawings rather than the business assets.   The interest on the loan was no longer being wholly and exclusively used for the purposes of Mr Kings’ trade as a property developer.

32.	The illustration provided by Mr Death would have a different outcome if the property, 19 Hillside Way, became an asset of Mr Kings’ business on  1 March 1990. In which case the balance sheet would return to shape and Mr Kings’ capital account would not be overdrawn. The loan interest would be funding the business assets. The interest would qualify as an allowable deduction under Case I  of Schedule D in accordance with section 74 of the 1988 Act. Thus for Mr Kings’ claim for error or mistake relief to succeed, he must show on the balance of the probabilities that the property, 19 Hillside Way, became an asset of his trade as a property developer on 1 March 1990. 

33.	It is common ground between the parties that Mr and Mrs Kings purchased 19 Hillside Way in 1988 as their private residence not as stock of Mr Kings’ business. The dispute between the parties is  whether 19 Hillside Way became an asset of Mr Kings’ trade on 1 March 1990 when the Appellants occupied 24 Harborough Road North as their home.  The Respondents accept that as a matter of law  it is possible for the owner  to change his intentions in respect of the use of his property between the dates of acquisition and disposal (per Orr, LJ in Lionel Simmons Properties Ltd v Commissioners for Inland Revenue 53TC at page 488E). However, in this Appeal the Respondents contend that the Appellants have not adduced sufficient evidence to discharge the burden of proof on the balance of probabilities that they changed their intentions in respect of 19 Hillside Way.  It is the Respondents’ view that 19 Hillside Way remained as a private investment of  Mr and Mrs Kings until it was sold in 2000. Mr and Mrs Kings, on the other hand, assert that 19 Hillside Way became an asset of Mr Kings’ trade on 1 March 1990.  The determination of the issue in dispute is essentially a question of fact.

34.	The following facts were not in dispute:
	
a)	Mr and Mrs Kings purchased 19 Hillside Way in 1988 as their private residence.	
b)	Mr and Mrs Kings jointly owned 19 Hillside Way from 1988 to 2000.
c)	19 Hillside Way was let to tenants from 1 March 1990 to 30 July 1998.
d)	Mr Kings carried out a range of building works on 19 Hillside Way to the value of £14,901 (materials only) between 1989 to 1999.
e)	Mr Kings was entitled to claim bank charges and interest on the overdraft facility with Midland Bank as an allowable deduction against tax up and until 28 February 1990 
f)	The mortgage with Leeds and Holbeck Building Society was secured on 19 Hillside Way and in the joint names of Mr and Mrs Kings.
g)	The monthly payments in respect of the Leeds and Holbeck mortgage were paid by way of direct debit from Mr Kings’ business account with the Midland Bank.
h)	Mr Kings changed his intentions in respect of 24 Harborough Road North from a business asset to a private residence as evidenced by the Income and Expenditure Account 1990.
i)	There was no corresponding entry in the Income and Expenditure Account 1990 for the transfer of 19 Hillside Way from private use to a business asset.
j)	Mr Kings had carried on the business of property developer since 1985.
k)	Prior to the purchase of 24 Harborough Road North Mr Kings had renovated six bungalows and sold them on at a profit.
l)	Mr Kings’ modus operandi was to renovate one property at a time and carry out modest renovations which did not involve major structural work. 24 Harborough Road North, however, was the exception because it involved a substantial conversion.
m)	Mr and Mrs Kings kept a separate house for their home during the time Mr Kings renovated houses for sale from 1985 to 1990.

35.	The following matters were in dispute between the parties:

a)	Whether it was possible for a jointly owned property (19 Hillside Way) to become an asset in Mr Kings’ sole trade.
b)	Whether Mr Kings’ Accountants made a mistake in not including 19 Hillside Way as a business asset in Mr Kings’ Income and Expenditure Account for 1990.
c)	The purpose and effect of the  financial arrangements entered into by Mr and Mrs Kings in 1990/1991.
d)	The significance of the schedule of works carried out by Mr Kings on 19 Hillside Way.

Whether it was possible for a jointly owned property (19 Hillside Way) to become an asset in Mr Kings’ sole trade?

36.	19 Hillside Way was acquired in the joint names of Mr and Mrs Kings and remained in their joint ownership until the premises were sold in 2000. The Leeds and Holbeck mortgage secured on 19 Hillside Way named Mr and Mrs Kings as the joint mortgagees. However, the tax returns and accounts submitted by Mr Kings showed that his business was carried on as a sole trader.   In those circumstances Mr Death for the Respondents queried whether a jointly owned asset could become an asset in Mr Kings’ business as a sole trader.  At the hearing Mr and Mrs Kings contended that Mrs Kings had become a partner in Mr Kings’ business. “We are a couple, we help each other out”. According to their evidence Mrs Kings rescued the business by putting into it her equity in Hillside Way.  She also loaned the business a further £10,000 in 1996. Mr Kings, however, accepted that there were no documents at all to support that his business was a partnership between him and his wife. The business account with the Midland Bank was in his name. Mr Kings conceded that he had not informed his Accountants, other than Mr Strange,  about the partnership.  Mrs Kings described her role as a “sleeping partner” leaving the business to be run by her husband except for the books, which she completed.  

37.   I fully accept that Mr and Mrs Kings worked in tandem to resolve the cash flow problems confronting Mr Kings’ business in 1989/1990 and that Mrs Kings’ supported her husband through these difficult times.  However, the fact that Mrs Kings helped out her husband is not sufficient to make her a partner in the business. The lack of documents supporting the existence of the partnership and that no-one appeared to be aware of it compels me to conclude that Mr Kings continued to run his business as a sole trader. 

38.	My finding that there was no business partnership between Mr and Mrs Kings does not rule out the possibility that 19 Hillside Way became an asset of Mr Kings’ business. Mr Death did not rely upon a legal or an accounting rule for his submission about the inclusion of jointly owned property in the accounts of a sole trader.  In my view the question whether such a property can become an asset of a sole trader depends upon the stated intentions of  the joint owners, which is the central issue of the error/mistake Appeal.  However, the main thrust of Mr Death’s submission was that when Mr and Mrs Kings moved out of 19 Hillside Way the ownership of the property did not change from the joint ownership of Mr and Mrs Kings to the sole ownership of Mr Kings.  Had this occurred it would have provided a powerful pointer that 19 Hillside Way had become part of  Mr Kings’ trading stock. The fact that there was no change in ownership in respect of 19 Hillside Way strengthens the Respondents’ case rather than the Appellants’. In contrast there was a change of ownership when Mr and Mrs Kings moved into 24 Harborough Road North from the sole ownership of Mr Kings to the joint ownership of Mr and Mrs Kings which begs the question why there was no corresponding alteration in the ownership of 19 Hillside Way. 

	Whether Mr Kings’ Accountants made a mistake in not including 19 Hillside Way as a business asset in Mr Kings’ Income and Expenditure Account for 1990?

39.	Mr Kings’ Income and Expenditure Account 1990 was a key document in this Appeal. It provided insight about Mr Kings’ intentions for the  business around the critical period of 1 March 1990.  Mr  J Strange of Smith Starmer and Hart, Mr Kings’ Accountants, submitted the 1990 Account to the Inland Revenue on 30 April 1992.  The Account  recorded the transfer of  Harborough Road North to private use under work in progress. However, there was no corresponding reference in the Account to the transfer of 19 Hillside Way from private use to trading stock. The description of Mr Kings’ business affairs in the Income and Expenditure Account 1990 supported the Respondents’ contentions.

40.	Mr and Mrs Kings were adamant that  Mr Strange knew about the transfer of  the equity of 19 Hillside Way into Mr Kings’ business. Mrs Kings supplied Mr Strange with the 1989/1990 accounts in the “Simplex Book” which had “post it” notes attached setting out the payments under the two mortgages. In their view: “Mr Strange knew, he was privy to the information, we (Mr and Mrs Kings) put it in our books”. Mr Strange played an important role in securing the Leeds and Holbeck mortgage for them by providing a statement of Mr Kings’ future earning capacity.  Mr and Mrs Kings concluded that Mr Strange let them down by not including the value of 19 Hillside Way in Mr Kings’ business accounts. 

41.	Mr and Mrs Kings relied on a passage in a letter from Mr Strange to Mr Kings dated 30 April 1992:

	“I do anticipate that he (Inspector of Taxes) will question the transfer of 24 Harborough Road North to yourself to try and ensure that you are receiving the correct amount of loan interest relief. We shall cross that bridge when we come to it obviously”.  

	Mr Kings believed that the above passage was evidence that Mr Strange had notified the Respondents about the potential claim for interest relief in respect of 19 Hillside Way: 

“This infers to me that he (Mr Strange) absolved any blame for not obtaining my correct relief leaving the interest relief  very much in the air and in the Inland Revenue’s court”.

Further Mr Kings suggested that the letter provided documentary proof of his intention to transfer 19 Hillside Way into his business.

I have considered the contents of Mr Strange’s letter and concluded that Mr Kings’ interpretation is incorrect. In my view the loan interest relief related to 24 Harborough Road North not 19 Hillside Way.  The contents of the letter provide no proof that 19 Hillside Way became an asset of the business. Mr Strange did not put the Respondents on notice about the issue of loan interest relief. His letter to them dated 6 May 1992  referred to the enclosure of  Mr Kings’ accounts, no reference was made to loan  interest relief.

42.	Mr Strange’s letter dated  30 April 1992 also stated that Mr Kings  approved the accounts, enclosing a copy for his records which raises the question why Mr Kings did not challenge at that time the accuracy of the accounts. 

43.	There is no evidence to support the suggestion that Mr Strange overlooked 19 Hillside Way when compiling Mr Kings’ Income and Expenditure Account for 1990. He was fully aware of Mr and Mrs Kings circumstances. He must have had a good reason for not including 19 Hillside Way in Mr Kings’ Accounts. I am satisfied that the 1990 Account represents the true and accurate position of  Mr Kings’ business affairs as perceived by his Accountant, Mr Strange.

The purpose and  effect  of the  financial arrangements entered into by Mr and Mrs Kings in 1990/1991.

44.	It is common ground between the parties that the original purpose of Mr Kings’ overdraft with the Midland Bank was to finance the building works at 24 Harborough Road North. Whilst this was being done the charges and the interest on the overdraft were an allowable business expense for tax purposes.  According to the Respondents the link between the loan facility and Mr King’s trade as a property developer was broken when Mr and Mrs Kings occupied 24 Harborough  Road North as their private residence. Thereafter, the Respondents believed that the overdraft and the subsequent   mortgage with the Leeds and Holbeck Building Society were effectively financing the appropriation of 24 Harborough Road North from Mr Kings’ business. 

45.	Mr Kings, on the other hand, submitted that the overdraft and the mortgage were being used to maintain his business. According to Mr Kings the mortgage from the Leeds and Holbeck  Building   Society was a business loan because it was interest only and attracted an interest rate one per cent higher than the standard rate.  

46.	Prior to January 1991 the Midland Bank held the deeds of  24 Harborough Road North as security against the overdraft facility. 19 Hillside Way was subject to a mortgage of £23,000 from the Nationwide Building Society.  On 9 January 1991 Mr and Mrs Kings’ solicitors received £94,995 from Leeds and Holbeck Building Society, and £30,000 from the Nationwide Building Society which were used to pay off the overdraft and  redeem the £23,000 mortgage on Hillside Way. The redemption of the Nationwide mortgage was described by Mr Kings as a “pseudo redemption”(paperwork was exchanged but no actual cash except for the additional monies remaining after redemption). The Leeds and Holbeck mortgage was secured against 19 Hillside Way, whilst 24 Harborough Road North provided the security for the £30,000 Nationwide mortgage.   Mr Kings presented these facts on the basis that there was an orderly transition in respect of his business assets and finances, namely: Hillside Way replacing Harborough Road North as his principal business asset and the Leeds and Holbeck mortgage succeeding the Midland Bank overdraft facility as his main source of business finance.

47.	My assessment of the facts is somewhat different from the orderly arrangements presented by Mr Kings. In 1989 the Appellants were facing a difficult situation. According to Mrs Kings: “the housing market  fell away, how are we going to keep up, interest rates were going sky high. We could not keep up with the interest payments of £19,000 per annum. It was snowballing”. Mr Kings took up employment with Persimmon  Homes and started another business as a kitchen equipment dealer. In the summer of 1989 Mr and Mrs Kings put their home, 19 Hillside Way, on the market originally for £170,000 followed by fairly rapid price cuts to £140,000. The property remained for sale until at least April 1991 when the asking price stood at £130,000. When their home did not sell they took advice and decided to pool all their assets to re-finance the bank loan. Hillside Way was let to provide an additional revenue stream which could be set off against the cost of the loans and provide a boost to Mr Kings’ earning capacity for the purposes of securing alternative financing. Harborough Road North was transferred out of Mr Kings’ accounts and became the family home. The alternative finance arrangement through the Abbey National fell through because Mr Kings could not meet the criterion of last two years trading. The mortgage secured from the Leeds and Holbeck Building Society did not clear entirely the sum owed under the overdraft with the result that it was necessary to obtain additional finance from the Nationwide Building Society.   During this period there was no sign of property development activity by Mr Kings rather he was deploying his skills as a sub-contractor and setting up his new business as a kitchen equipment dealer. 

48.	I consider that Mr and Mrs Kings deserve great credit for the steps that they took during this period to avoid  potentially disastrous consequences from the severe economic recession. However, my analysis of the reasons for those steps were to preserve a reasonable standard of living and  to safeguard their personal capital rather than save Mr Kings’ business as a property developer. 19 Hillside Way was central to their strategy as an investment providing a revenue stream not as an asset for Mr Kings’ ailing property development business.

	The significance of the schedule of works carried out by Mr Kings on 19 Hillside Way.

49.	The nature of trading stock  involves selling it on at a profit after working on it and improving its value. The Respondents contended that this did not happen in respect of 19 Hillside Way at or near the material time of March 1990 when Mr Kings stated that the property had become part of his business. In contrast Mr Kings submitted that he had carried out improvement works on 19 Hillside Way to the value of £14,901 for materials only,   (see the schedule in paragraph 18). The work was spread over a period of ten years from 1989 to 1999. He was prevented from carrying out improvements inside the house because Mr and Mrs Hughes, the tenants of Hillside Way refused him entry. Mr Kings  tried to evict the tenants around 1992 but the neighbours to 19 Hillside Way did not back him with the result that Mr and Mrs Hughes acquired sitting tenants’ rights and were not removed from the property until they left of their own accord on the 30 August 1998.

50.	The Respondents accepted that Mr Kings  improved 19 Hillside Way but the timing of those improvements suggested to them that they were not connected with Mr Kings’ trade as a property developer. Over one third of the expenditure on improvements which included fitting a new bathroom and kitchen and decorative work to the ceilings and the lounge was incurred in 1989 when Mr and Mrs Kings occupied 19 Hillside Way as their home. At that time Mr and Mrs Kings had no intention of moving out of 19 Hillside Way and appropriating the property as trading stock for Mr Kings’ business.  The other main period  for expenditure on the property was in 1998/1999 after the departure of Mr and Mrs Hughes when a further £4,696 was spent including installation of central heating. The Respondents say that the expenditure in 1998/1999 was too late in time to demonstrate a change of intention on the part of the Appellants in 1990 about the supposed transfer of 19 Hillside Way to trading stock.

51.	Mr and Mrs Kings’ Estate Agents advised them in 1990 that 19 Hillside Way had not sold because it required a modern central heating system and an en-suite to the bedroom. If this was known in 1990 why were the required improvements not carried out then when according to Mr Kings 19 Hillside Way had become part of his trading stock. The fact that the central heating and the en-suite were installed in 1999 rather than in 1990 adds support to the Respondents’ contention that the improvements carried out on 19 Hillside Way were not connected with Mr Kings’ trade as a property developer.

52.	The Respondents pointed out that 19 Hillside Way had been put on the market prior to March 1990 which indicated to them that the Appellants did not intend to renovate the property and treat it as trading stock because no time had been allowed for the works. Further, the Appellants had no available funds in February 1990 to carry out improvements because Mr Kings had exceeded his limit on the overdraft with the Midland Bank. After the new financial arrangements were put in place in 1991, Mr Kings had the ability to draw on an overdraft of £5,000. He also deposited £14,000 in his business account on the 13 August 1991. This injection of funds did not herald a fresh period of sustained activity by Mr Kings to carry out the necessary renovations of 19 Hillside Way.  On the evidence Mr and Mrs Hughes did not have sitting tenants’ rights in 1991.  The property was subject to an assured shorthold tenancy which could have been brought to an end at the expiry of the contractual term enabling Mr Kings  to undertake the improvements.

53.	I am persuaded by the Respondents’ submission that the schedule of improvements to 19 Hillside Way do not support the Appellants’ case that the property was transferred to trading stock on 1 March 1990. I place particular weight on the chronology which indicated that the major improvements to 19 Hillside were either carried out when Mr and Mrs Kings were in private occupation or at a date too distant from 1 March 1990.  Further, 19 Hillside Way was  on the market prior to March 1990. There were no funds at the material time available for improvements to  19 Hillside Way.  These findings of fact provide additional support for the conclusion that I have reached on the significance of the schedule of improvements.

Determination of the Claim for Error or Mistake Relief 1992/93 to 1995/96
(Should the interest paid on the mortgage with the Leeds and Holbeck Building Society  be allowed in full as a business expense?)

54.	Mr Kings feels very aggrieved about the Respondents’ decision not to allow in full the interest payments on the Leeds and Holbeck mortgage as a business expense. Mr and Mrs Kings are hard working people who took decisive action including moving out of their home to a smaller property to ensure that they did not become a burden to the tax payer. Mr Kings looks on his business as a single entity. He does not distinguish between working as a sub-contactor, property developer and landlord as separate businesses. Unfortunately his global view of the business does not fit in with the Tax Law which requires categories of income to be assessed for tax under different schedules and each schedule having different permutations for calculating expenses that reduce the potential income eligible for income tax.

55.	Mr Kings believes that he is entitled to the full interest payments on the mortgage as a business expense because he says 19 Hillside Way became part of his business on the 1 March 1990. The strongest factor in Mr Kings’ favour is that he had been carrying on the trade of property developer since 1985, renovating one property at a time whilst retaining a separate property for his family home. However, the facts show that effectively he ceased to develop property in 1989 due to circumstances beyond his control, namely, the rapid rise in interest rates and the fall in the housing market. Mr Kings responded to this difficult economic climate by diversifying: sub contracting with Persimmon Homes and setting up a kitchen equipment dealership. Mr and Mrs Kings decided to put their home up for sale in the hope that the proceeds would clear the overdraft with the Midland Bank. When the sale did not materialise they decided to re-structure their financial borrowings using 19 Hillside Way as security for the loan and as a source of additional revenue. Mr Kings assumed the role of landlord with the rents paid into his business account. However, the business of renting out property is not the same business as renovating and selling property. The rental business is governed by the requirements of  Schedule A of the Tax Acts which limits the amount of relief that can be claimed against loan interest. In order for Mr Kings to claim the relief on the full loan interest payments  he must establish on the balance of probabilities that on the 1 March 1990 19 Hillside Way became part of the trading stock of his property business assessed for tax under Case 1 Schedule D of the Tax Acts. The fact that Mr Kings received income in the form of rents from 19 Hillside Way is a factor which  goes against his assertion that 19 Hillside Way became trading stock.

56.	Mr Kings has not satisfied me on the balance of probabilities that 19 Hillside Way became part of his trading stock on 1 March 1990. My starting point is that 19 Hillside Way was purchased in 1988 as a private house. I can find no persuasive evidence that supports a change of intention on the part of Mr and Mrs Kings on 1 March 1990 to transfer the property to trading stock.  I am satisfied that there was no business partnership of Mr and Mrs Kings. The property was not transferred to the sole legal ownership of Mr Kings unlike 24 Harborough Road North which was transferred into joint ownership. The accounts for the relevant period do not show that 19 Hillside Way was brought into the business. I am satisfied that Mr Kings’ Accountants did not make a mistake when compiling the accounts by leaving out 19 Hillside Way.  The chronology for the improvements to 19 Hillside Way showed that the improvements were not connected in time with the 1 March 1990 when the property was apparently transferred to business stock. In my view the actions taken by Mr and Mrs Kings in 1990 were designed to preserve their standard of living and to safeguard their capital rather than save Mr Kings’ business as a property developer. Thus the interest paid on the Leeds and Holbeck mortgage cannot be allowed in full as a business expense because 19 Hillside Way was not appropriated to the trading stock of Mr Kings’ business. I, therefore, dismiss Mr Kings’ appeal in respect of his claim for error or mistake relief  for the tax years1992/93, 1993/94, 1994/95 and 1995/96 for the reasons outlined above.
  
Whether the rental receipts from 19 Hillside Way should be charged to tax on Mr Kings alone or shared equally between Mr and Mrs Kings?

57.	Income from property is charged to tax under Schedule A of the Tax Acts.  Schedule A is set out in section 15 of the 1988 Act. Under section 21(1) of the 1988 Act:

“Income tax under Schedule A shall be charged on and paid by the persons receiving or entitled to the profits or gains in respect of which tax under that Schedule is directed by the Income Taxes Act to be charged” (pre 1995-96). 

“Income tax under Schedule A shall be charged on and paid by the persons receiving or entitled to the income in respect of which the tax is directed by the Income Tax Acts to be charged” (post 1995-96).

58.	Mr and Mrs Kings were not married during the period to which the Appeals relate.

59.	Mr and Mrs Kings were the joint owners of 19 Hillside Way from 4 July 1988 to 28 July 2000.

60.	The Respondents contended that where property was jointly owned, the rents from that property would normally be assessed on the owners in proportion to their shares in the property. Further, even where the rents were received by one of the parties that in itself was insufficient to shift the presumption that both owners were entitled to their share of the rents. Thus according to the Respondents there would need to be clear evidence demonstrating that Mrs Kings had given up her entitlement to the half share of the rents and that this act should be recorded in writing.

61.	The Respondents  relied on documentary evidence to support their submission that Mrs Kings should be assessed to tax on the half share of the rents received. In particular the correspondence from the Nationwide Building Society addressed to both Mr and Mrs Kings agreeing to the letting of 19 Hillside Way and an invoice from Barry Paterson (Plumbing and Heating) dated 12 October 1990 which referred to Mr and Mrs King as the landlord of the property.  Mr Death for the Respondents also referred to the letter of Mr Smith (Mr and Mrs Kings’ Accountants at the time) of the 18 September 1996 where he suggested that the rents from 19 Hillside Way should be shared equally between  Mr and Mrs Kings. 

62.	I am in some difficulty with the Respondents’ interpretation of the statute as cited to me at the hearing. Under section 21(1) of the 1988 Act it states that “tax shall be charged on and paid by the persons receiving or entitled to the payments”. I interpret the wording that it can be either the person receiving or the person entitled to the payments that is charged to tax. The section does not specify that persons entitled should be charged to tax before persons receiving. Also there is no requirement in the statute for the person entitled to evidence in writing his surrender of that entitlement. Even if I am wrong on the construction of section 21(1), I am satisfied that there is clear evidence that Mrs Kings surrendered her entitlement to the rents received on 19 Hillside Way and that Mr Kings alone is assessable to income tax on the rents received. My conclusion is based on the following:

a)	My finding that there was no business partnership between Mr and Mrs Kings.
b)	The oral testimony of Mrs Kings where she agreed that the rent should be paid into Mr Kings’ bank account.
c)	The rent throughout the various tenancies was paid into Mr Kings’ bank account with the Midland Bank. Mrs Kings had no control over this account. 
d)	Mr Kings was named as the landlord on the “Agreement to let 19 Hillside Way” dated 20 December 1991. No copy of the original tenancy agreement was provided.
e)	The neighbours’ complaint dated 10 October 1994 about the alleged nuisance committed by the tenant was addressed to Mr Kings.
f)	Mr Kings was referred to as the landlord in the witness statement dated 14 November 1996 of Patrick Paul Field , the letting agent for 19 Hillside Way. The witness statement makes no mention of Mrs Kings and referred exclusively to Mr Kings and his dealings with property.
g)	Mr Kings alone signed the letter dated 3 November 1997 advising Mr and Mrs Hughes of the intention to issue a possession summons.
h)	Mr and Mrs Kings were adamant that Mr Smith was acting without instructions regarding the sharing of the rent equally between them. It is accepted by both parties that Mr Smith  made mistakes in respect of his dealings on behalf of Mr and Mrs Kings.

63.	In view of my findings I have decided that the rents received from 19 Hillside Way  should be assessed for tax against Mr Kings alone. I, therefore, allow the appeal of Mrs Kings in respect of the tax assessments for the years 1996/97, 1997/98 and 1998/99 insofar as they relate to  the rents received from Hillside Way.

Matters not in Dispute at the Appeal Hearing but Requiring a Determination

64.	The following matters were not disputed at the hearing but require a determination in order to calculate the correct tax assessment following on my decisions on the two substantive matters:

The Amount of Loan Interest Allowed as a Deduction against the Net Rental Income

The Respondents have allowed Mr Kings to claim for relief against the rental income the interest paid on that part of the Leeds and Holbeck mortgage which redeemed  the original Nationwide Building Society mortgage  secured on 19 Hillside Way   in January 1991. The Respondents’ conclusion on this matter was based on the construction of sections 353, 354 and 355 of the 1988 Act which essentially allows relief on the interest of a non-MIRAS loan up to the limit of the MIRAS loan replaced. I, therefore, determine that Mr Kings is eligible for relief against the rental income in respect of the interest paid on that part of the Leeds and Holbeck mortgage which redeemed  the original Nationwide Building Society mortgage.

The Discovery Assessment for 1996/97

The assessment related to tax charged on income from property and £385 of pension income. Mr Kings did not contest at the hearing the tax assessed on the pension income. I, therefore, confirm the assessment in relation to the pension income.

The Claim for Loan Interest Relief  of £4,918 by Mr Kings against General Income in his 1997/98 Return and Associated Matters.

In the 1997/98 return Mr Kings  claimed interest relief of £4,918 against general income and against property income, thus making a double deduction for the same amount. Mr Kings was not entitled to claim the interest relief against general income. He also claimed a loss of £778 in that year which he purported to offset against general income. The Respondents state in the first instance that there was no loss because the correct figure of loan interest allowable was smaller than that claimed but in any event the loss cannot be set against other income: it should be carried forward against future profits from the rental business. These matters were not disputed by Mr Kings. In those circumstances I find in favour of the Respondents in respect of the above matters relating to the 1997/98 return.

1998/99 Self Assessment

The self assessment declared a rental income loss of £7,559 set off against general income. The Respondents amended the self assessment by disallowing the reported loss because it cannot be set off against general income. I agree with the Respondents’ amendment.

No Deduction for Bank Interest in the Business Accounts for the Year ended 31 October 1990

This matter is outside the periods covered by the Appeals before me. Therefore, I am unable to make a formal determination on this issue. However, I note that the Respondents have indicated that they will give some allowance for this oversight on the part of Mr Kings.

Calculation of Tax Liability

65.	At the end of the hearing on 27 November 2003 I directed that the Respondents calculate  the assessments for tax for the potential outcomes arising from the Appeals and agree the assessments with the Appellants and deliver them to me by the 20 December 2003.  The assessments were faxed to the Office of Special Commissioners on the 18 December 2003. The Appellants wrote to the Office on 17 December 2003 stating that they were agreeable to the way in which figures and scenarios have been put together by the Respondents except the following three points:

a)	The main base figure on which these computations have been worked out on, namely £23,000.
b)	No interest has been added and they would have expected it to have been.
c)	Draft final account on the sale of Hillside Way. 

Points a) and b) are only relevant if I found in favour of Mr Kings’ claim for error or mistake relief which I did not. Point c) relates to the tax year 2000/01 which is not before me on Appeal. However, I note the Respondents assertion in their letter dated 18 December 2003 that the Appellants incur no liability to Capital Gains tax  on the sale of the property  because of the various reliefs available. 

66.	The Office of Special Commissioners received an additional letter dated 30 December 2003 from Mr and Mrs Kings which seemed to cast doubt on their conditional agreement with the  assessments for the various outcomes submitted by the Respondents on 18 December 2003. I have read this letter several times and concluded that it is a re-statement of their case rather than a challenge to the correctness of the assessments other than the three points in dispute.  In any event I am satisfied about the accuracy of the assessments and make the following determinations in respect of the five Appeals before me.

Determinations

67.	I make the following determinations:

Appeal 1: Error or Mistake Claim

I dismiss Mr Kings’ Appeal in respect of his claim for error or mistake relief in respect of the tax years 1992/93, 1993/94, 1994/95 and 1995/96.

Appeal 2: Assessments of income tax on income from UK land and property 

I determine that Mr Kings is liable for income tax on the rents received from 19 Hillside Way in the following amounts for the stated tax year:

Tax  Year	Chargeable Income (£)	Tax Due (£)	
1992/93	3,346	836.50	
1993/94	3,532	883.00	
1994/95	4,142	1,035.50	
1995/96	3,926	981.50	

Appeal 3: 1996/97 discovery assessment 

I determine that Mr Kings is liable for income tax in 1996/97on £1,222, assessable income on the rents received from 19 Hillside Way and £385 in respect of pension income which produces an additional charge to tax of £385.68.

Appeal 4: Amendments to self assessment for 1997/98 and 1998/99

I determine that Mr Kings is liable for income tax in 1997/98 on £2,486, assessable income on the rents received from 19 Hillside Way. I have also disallowed the loss of £778 declared in the self assessment. These amendments require Mr Kings to pay additional tax in the sum of £1,488.42 for 1997/98.

I determine that Mr Kings is liable for income tax in 1998/99 on £151, assessable income on the rents received from 19 Hillside Way. I disallow the loss of £7,559 declared in the self assessment. These amendments require Mr Kings to pay additional tax in the sum of £1,773.30 for 1998/99.

Appeal 5: Assessment of income tax on income from UK land and property (Mrs Kings)

I have allowed Mrs Kings’ Appeal against assessments for income tax in respect of the rents received from 19 Hillside Way for the tax years 1996/97, 1997/98 and 1998/99. Therefore, the assessments are no longer valid.

Bank Interest for the period up to February 1990

I note that the Respondents have accepted a deduction in the sum of £7438 for bank interest for the period up to February 1990 which will be set off against the 1991/92 error or mistake claim and may reduce the tax payable by Mr Kings  in the tax years 1992/93, 1993/94 and 1994/95.  This concession by the Respondents, however, cannot form part of my decision because the 1991/92 claim for error/mistake relief was not before me.

Costs

My power to award costs is limited in that I can only award costs against a party if I am of the opinion that the party has acted wholly unreasonably in connection with the hearing.  I am not of that opinion, therefore, I make no order for costs.

MICHAEL TILDESLEY
SPECIAL COMMISSIONER

SC 3016/02
SC 3071/02