Replies to Queries - 1 - Landed estate

We act for trustees who own the freehold of a landed estate. Parts of it were developed well before 1965. Long leases of individual plots were granted to enable it to be done.

Since 1965 and, for that matter, for many years before that, there has been a steady flow of applications from leaseholders to carry out certain works on their properties which require the freeholder's approval. In each case agreement has usually been reached and a capital sum is paid. The original lease is modified or varied to permit the works in question.

Since 1965 there has been no incidence of capital gains tax on these proceeds, which are also otherwise untaxed, because of the provisions of Schedule 8(3) to the Taxation of Chargeable Gains Act 1992 (and formerly Schedule 8(2) to the Finance Act 1965) which effectively said that the sums received for variation of the leases were to be treated as having been received at the date of the grant of the lease in question. That was pre-1965 so no tax was due.

In 1996 there was a little noticed change. It was brought in to avoid earlier computations having to be revised under the new self-assessment rules. Somewhere or other we have read that that was the explicit purpose of the change. It is enshrined in section 142, Finance Act 1996 (which amended Schedule 8(3)) and the new rules now say that where a sum is received for a modification or variation of a lease, the receipt of that sum is the date of disposal for capital gains tax purposes and it is a part-disposal. In other words, in our client's case what appears to be a procedural change has a danger of netting a string of capital receipts that would otherwise have been put back to pre-capital gains tax days.

What do we do?

(Query T16,048) - Miffed.

While the reformulation in 1996 of paragraph 3(3) of Schedule 8 to the Taxation of Chargeable Gains Act 1992 was indeed to convert it into a form suitable for self assessment, it was by no means clear in which year a charge under the old text arose.

The presumption was certainly that it should be related back to the year in which the lease was granted, but this was not stated in terms and, in particular, no extension to the six-year assessment period was provided for in order to enable this to be done. It would have been a peculiar result if a variation in 1995 of a lease granted in 1970 fell out of charge because it was no longer open to the Inspector to issue an assessment for 1970-71. This particular issue was, however, (and perhaps surprisingly) never litigated.

The variation in the wording of paragraph 3(3) should be compared to that in section 34(5), Taxes Act 1988. The provision which applies depends upon not only the length of the unexpired term, but also to the period over which the variation is to have effect. It is possible, therefore, that some of the transactions previously thought to be outside the ambit of capital gains tax may now be ones which have to be returned, in part, for Schedule A purposes.

For capital gains tax purposes, the receipt is treated, under the terms of the revised paragraph 3(4)(b) of Schedule 8 to the Taxation of Chargeable Gains Act 1992, as a separate transaction consisting of a further part disposal of the freehold reversion. In order to arrive at the taxable gain, it will therefore be necessary to ascertain the 31 March 1982 value, index it until April 1998, and then apply the A/A+B formula (of section 42, Taxation of Chargeable Gains Act 1992) at the date upon which the capital sum is due in order to arrive at the mathematical gain, before applying taper relief. In most cases, this is likely to result in almost the whole of the pre-taper sum being brought into charge.

An alternative which may be open to the trustees in years of assessment in which land disposals do not exceed £20,000, would be to claim small disposal treatment under section 242, Taxation of Chargeable Gains Act 1992. - JdeS.

Paragraph 3 of Schedule 8 to the Taxation of Chargeable Gains Act 1992 does not really look as if it were enacted to avoid the revision of earlier computations under self-assessment rules. Rather it seems aimed at taxing gains that had previously, and illogically, escaped attention. Prior years are treated in subparagraph 4, which provides that a premium deemed to be received under subparagraph 2 or 3 'shall not be the occasion for recomputation of the gain accruing on the receipt of any other premium', which expression includes transactions in earlier years. This is ancillary to the main aim of taxing what it defines as premiums.

On the expiry of a lease, the property returns to the landlord complete with all improvements, e.g. new buildings or extensions to the original ones. The lessee can remove only what 'is not nailed down or painted'. Consequently, any development wrought by him is a gift to the landlord as it adds significantly to the reversionary value. Before carrying out any works, permission must be sought, in the form of a licence from the landlord or a variation in the lease, for which the lessee has to pay. In the case of licences, the amount can be small, often little more than legal, etc. fees nominally incurred by the landlord. However, as in this case, a further capital sum is sometimes exacted, which could be:

Either of these is deemed to be a premium received, giving rise to a taxable gain. This case concerns the second category above, that is premiums received on a taxable part disposal. Not only is the development an addition to the property in which the lessee retains only a transient interest, but he is actually made to pay a capital sum for the privilege of making the gift. Taxation of this was long overdue. Careful study of paragraph 8 shows that it is not just a procedural change. It merely includes one incidentally to its main purpose of taxing premiums, and reclassifying liquidated rent received from revenue (income tax) to capital (capital gains tax). - Man of Kent.

Issue: 3868 / Categories: