Our client, a limited company with a 30 June year-end and owned and controlled by Mr B, acquired a four-storey property before March 1982. The ground floor shop (65 square metres) and the basement (45 square metres) have to date been used for carrying out its retail trade. The two rooms (30 square metres) on the first floor are used as a private residence and administration office. The two rooms (30 square metres) on the second floor and the three rooms (35 square metres) on the third floor were used on and off as residential and let on an informal basis.
Our client, a limited company with a 30 June year-end and owned and controlled by Mr B, acquired a four-storey property before March 1982. The ground floor shop (65 square metres) and the basement (45 square metres) have to date been used for carrying out its retail trade. The two rooms (30 square metres) on the first floor are used as a private residence and administration office. The two rooms (30 square metres) on the second floor and the three rooms (35 square metres) on the third floor were used on and off as residential and let on an informal basis.
In March 2001 the company granted a 999-year lease on the first, second and third floors for £200,000, whilst retaining the ground floor and the basement, which continue to be used for its trade. The part retained has a current market value of £150,000, if sold with the business. The original cost and the March 1982 value of the whole building was circa £25,000 and £60,000, respectively.
What is the company's tax liability in respect of (a) the lease granted in March 2001 and (b) the remainder, if disposed of in the next few months?
Readers' assistance would be very much appreciated.
(Query T15,841) – JYB.
The grant of the lease requires a gain to be calculated using the 'A over A plus B' formula (section 42, Taxation of Chargeable Gains Act 1992). One figure is missing, although it may perhaps be negligible – the value of the freehold reversion of the 999-year lease, which presumably was retained on the grant of that lease. 'A over A plus B' uses the market value of what is retained (£150,000) and the proceeds received (£200,000) to split the base cost, which would be the March 1982 market value. Indexation to March 2001 (continuing, for a company) stands at 116.8 per cent. The computation is therefore:
Proceeds | 200,000 |
Cost: Market Value 1982 |
|
(£60,000) x 200/350 | 34,286 |
Indexation at 116.8% | 40,046 |
Chargeable gain | £125,668 |
This would be charged to corporation tax as part of the profits for the accounting period ended 30 June 2001. No taper relief is due to companies. The actual tax liability will depend on the amount of other reliefs available and other profits chargeable in the company, but is at most 30 per cent x £125,668 = £37,700.
The various floor areas and the use of the different spaces appear to be irrelevant to the computation of the gain. Unless separate values could be established for the different parts of the building at March 1982, there is no reason to use anything other than 'A over A plus B'. If the different parts of the building could be regarded as separate assets, then perhaps a different apportionment of the cost could be suggested (section 42(4), Taxation of Chargeable Gains Act 1992).
The use of the asset would be relevant if it was proposed to claim rollover relief for the gain. It seems that some small amount of these three floors has been used in the business. If that has been the case throughout the period of ownership, then perhaps one-sixth of the gain could be treated as a gain on a qualifying business asset, and rolled over into the purchase of another qualifying business asset within the one year before and three years after March 2001.
It is assumed that the value of £150,000 is wholly attributable to the building. The expression 'if sold with the business' suggests that there may be some goodwill element within it. If that is the case, it might be arguable that the 'A over A plus B' fraction in the above computation should be adjusted, and a larger proportion of the cost should be given to the upper floors (because the value of the part retained would be lower).
If the value of £150,000 is all attributable to the building, and that is realised on the subsequent sale (still assuming that the freehold reversion is insignificant), the second gain uses the remainder of the cost:
Proceeds | 150,000 |
Cost: Market Value 1982 remaining | 25,714 |
Indexation at 116.8% | 30,034 |
Chargeable gain | £94,252 |
This only includes indexation up to March 2001. A later disposal will enjoy slightly more indexation, and may fall into the following accounting period. The maximum tax liability is in the region of 30 per cent x £94,000 = £28,200.
This gain appears to be entirely eligible for rollover relief if a new qualifying asset is purchased within the time limits. – Castlegate.
The building is a single asset for capital gains tax purposes and the granting of the long lease in March 2001 is a part disposal of the freehold interest in the property.
Applying the part disposal formula to the March 1982 value of the property, the base cost of the part disposed of in March 2001 becomes:
£60,000 x 200,000/(200,000+150,000) = £34,286.
Indexation allowance will be at least £39,944 (using the factor from March 1982 to February 2001 of 1.165) resulting in a gain, before any incidental costs of disposal, of £125,770.
The base cost of the part retained will be £60,000 – 34,286 = £25,714.
Again assuming an indexation factor of 1.165 (the latest published figure) and disposal proceeds of £150,000, the gain for a disposal within the next few months will be in the order of £94,329, before incidental costs of disposal.
'JYB' states that the value of the part retained after the lease was disposed of has a current market value of £150,000 if sold with the business (my italics). If the open market value of the part retained in March 2001 is thought to have been significantly different from £150,000, 'JYB's' client should obtain a professional valuation of the open market value of the remainder of the asset at that date, and substitute it for the £150,000 in the above workings.
As the acquisition cost of the building is less than the March 1982 value, any computation using that lower value is bound to give a larger gain. It is the lower of the two gains that is assessable. The use to which the various floors has been put does not affect the computation. – Taxplanet.
Extract from reply by 'Lane':
A further disposal (of the remainder) would permit deduction of base cost £25,715 (£60,000 minus £34,285), also with indexation allowance from 31 March 1982 up to the date of disposal. If the company intended to continue occupying for business the lower floors to be sold, an appropriate lease should first be reserved and only the reversion sold. Advice is needed on stamp duty aspects of these various arrangements.