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Replies to Queries -- 4 -- Property conduit

08 August 2001
Issue: 3819 / Categories:

In 1992 our husband and wife clients sold a property that they owned to a company which five members of their family equally owned.

The consideration charge was thought to be a fair price. However, the Inspector referred the matter to the District Valuer who considered that the value was in fact substantially less.

This transaction gave rise to a capital loss to our clients which we understand can only be used against a capital gain arising on a similar transaction between them and the company.

In 1992 our husband and wife clients sold a property that they owned to a company which five members of their family equally owned.

The consideration charge was thought to be a fair price. However, the Inspector referred the matter to the District Valuer who considered that the value was in fact substantially less.

This transaction gave rise to a capital loss to our clients which we understand can only be used against a capital gain arising on a similar transaction between them and the company.

They are now considering selling a further property that they own which has a substantial capital gain and are proposing to transfer it to the same limited company at the open market value prior to its eventual sale. The gain would use up a substantial amount of the capital loss that has been carried forward over the years.

Do readers see any problem in carrying out the transaction in this manner?

(Query T15,855) – Suffolk Boy.

 

The first issue to consider is whether the husband and wife and the company are connected persons within the meaning of section 286, Taxation of Chargeable Gains Act 1992. A company is connected with another person if that person has control of it, or if that person and the persons connected with him, together have control of it.

A person is connected with an individual if that person is the individual's spouse; a relative of the individual; the spouse of a relative of the individual; a relative of the individual's spouse or the spouse of a relative of the individual's spouse. A relative is a husband or wife, ancestor or lineal descendant.

Section 286(7) also directs that any two or more persons acting together to secure or exercise control of a company should be treated in relation to that company as connected with one another, and with any person acting on the directions of any of them to secure or exercise control of the company. The Revenue instructions (at paragraph CG14622 of the Capital Gains Manual) note that for this subsection to operate it is not sufficient for the persons to have control of the company; the persons do have to act in some way to control the company. However, for example, exercising control could mean refraining from voting in a particular way and so enabling another person to win a vote, as well as by actually voting.

If either the husband or wife is connected with the company, then 'Suffolk Boy' is right to conclude that any loss that has arisen on an earlier disposal can only be set off against gains arising on another disposal between the same two connected persons, either in the same year or a later year, if the disposal takes place at a time when the persons concerned are still connected (section 18(3), Taxation of Chargeable Gains Act 1992).

There should be no objection to channelling the second property disposal through the company, to utilise the connected person losses, provided that the onward sale from the company to the end purchaser has not been agreed before the disposal from husband and wife to the company takes place. If the second sale is agreed before the first takes place, there must be a danger that the Revenue would seek to apply the Ramsay principle and argue that the two transactions constitute a single composite transaction. If the Revenue were successful with this argument, husband and wife would not be able to utilise the connected persons losses from the earlier transaction, as the transaction would be deemed to be between husband and wife and the end purchaser.

The stamp duty liability on the sales should be considered. If duty is payable on both transactions, the extra duty payable will reduce the saving achieved by utilising the connected person losses. – Taxplanet.

 

Section 18(3), Taxation of Chargeable Gains Act 1992 states that a loss arising from a transaction with a connected person cannot be set against gains arising from any transaction other than one with the same connected person. The two have to be connected persons at the time of the original transaction and the second transaction.

We are not given enough detail of the shareholdings apart from 'members of their family'. I have assumed that they are indeed connected. However, it may be worth checking section 286, Taxation of Chargeable Gains Act 1992. The company must be controlled by the individual and persons connected with the individual. Connected persons are spouse together with the individual's or spouse's brother, sister, ancestor or lineal descendent, spouses of those. It is just possible that, in a wider family holding, nephews and nieces have come onto the scene to confuse the issue.

Provided the company and the husband and wife are connected, the loss will be available to set against the gain. The only issue might be if there is already a purchaser lined up for the property so that the company never really obtains beneficial ownership. The gain will then arise to the husband and wife.

In view of the previous disputed value, has a professional valuation been undertaken this time? It may even be worth including an adjuster clause in the sale agreement so that, if the value is accepted to be different from the value used, it can be adjusted without unwanted tax side effects. – JWG.

Issue: 3819 / Categories:
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