Limited liability partnership was carrying on a business

The trustee (GH) of three family trusts was the director and shareholder of GCH Corporation Ltd. The trusts and the company built up substantial shareholdings in another company. With a possible takeover of that company in mind GH incorporated GCH Active LLP as part of a tax mitigation strategy – which was disclosed to HMRC under the disclosure of tax avoidance scheme (DOTAS) rules.

After the takeover the trusts and the company exchanged their shares for loan notes. Then they sold the loan notes to the LLP at a 2% discount to face value. The LLP was then liquidated.

The taxpayers claimed there would be no charge to capital gains because the LLP was carrying on a financial trade when the loan notes were transferred to it. If it were not considered to be trading it would ‘at the least’ be carrying on a business....