Fry v Salisbury House Estate Ltd [1930] AC 432

Facts

  • Mr. Fry granted a 99-year lease of a block of flats to Salisbury House Estate Ltd.
  • The lease agreement included a substantial initial (upfront) payment and a small annual rent.
  • The tax authorities argued the upfront payment, though described as capital, should be taxed as income under Schedule D of the Income Tax Act 1918.
  • Mr. Fry contended that the upfront payment was a capital sum not subject to income tax.

Issues

  1. Whether the large upfront lease payment constituted income taxable under Schedule D, or was a capital sum not subject to income tax.
  2. Whether the payment should be treated as income from land ownership within Schedule A, or as business profits under Schedule D.
  3. How to distinguish between income and capital in transactions involving property leases.

Decision

  • The House of Lords reversed the Court of Appeal, ruling entirely in favour of Mr. Fry.
  • The upfront payment was held to be a capital sum, not taxable as income under Schedule D.
  • The agreement was treated as a transfer of part of a leasehold interest, a capital asset.
  • The characterization as a capital asset transfer, rather than recurring rental income, dictated the tax treatment.
  • The small annual rent did not alter the capital status of the initial payment.

Legal Principles

  • The legal structure of a transaction determines its tax treatment, not merely the amounts involved.
  • Upfront payments for leasing property are generally capital sums, reflecting the transfer of part of a capital asset.
  • Regular, recurring rent is distinguished from one-time lump sum payments for tax purposes.
  • Schedule A taxes income from ownership of land; Schedule D taxes business profits from land-related activities.
  • Upfront lease payments are not business income under Schedule D, but capital sums outside the scope of income tax.

Conclusion

Fry v Salisbury House Estate Ltd [1930] AC 432 established that substantial upfront lease payments are treated as capital sums from the transfer of a capital asset and are therefore not taxable as income under Schedule D. This decision clarified the distinction between capital and income in property taxation, influencing later cases and ongoing tax policy.

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