Shops and flats

In 1977, Mr and Mrs R purchased two shops, with flats over, for £20,000 from which they traded as two separate businesses. Mrs R traded as a sole hairdresser and Mr R as a sole dry cleaners. In 1989, Mr R died intestate and Mrs R took over the dry cleaners. No value was placed on the properties as they were in beneficial joint ownership, but the dry cleaning business was valued at £20,000.

Mrs R ceased to trade as a dry cleaner in 1993 and the premises were let. She ceased as a hairdresser in May 2000 and converted both shops into flats. The upstairs flats were let throughout the period of ownership.

In July 2001 she sold all the flats, both the original ones and those converted later.

It would probably be beneficial to use the 1989 value of her husband's half share as part of her base cost, but this is an unknown quantity. As they were joint tenants, am I forced to use the joint base cost of £20,000?

Presumably Mrs R is entitled to retirement relief on the sale of her 'shop', but the sale contract was for four flats, with no breakdown.

(Query T16,085) - Hairdrier.

My first line of approach to this query is to consider the history of the flats over the two shops bought in 1977. Without any specific description, and combined with the fact that in May 2000 both of the shops were converted into flats, I have assumed that the original properties were originally built as single houses and, like so many high street premises today, the downstairs were at some time converted into shops. Therefore the rental income from these flats would not have been treated as business income; this immediately excludes the sale of the upstairs flats from any retirement relief.

Mrs R's position in July 2001 was that in May 2000 she had qualified for the full ten years of retirement relief (paragraph 13(1) of Schedule 6 to the Taxation of Chargeable Gains Act 1992) and she had not disposed of her hairdressing business, but just ceased trading. Then, about fourteen months later, she sold her business premises.

As per section 163(2) and (3), the period between discontinuance and the date of disposal of the business asset should not exceed one year. However, under paragraph 2 of Schedule 6 the Revenue is allowed to extend this period. In the Revenue's Capital Gains Manual at paragraph CG63582 it states:

'Permitted period - You may allow a permitted period of up to three years if:

'If the asset, or any chargeable business asset of the company, has been leased or used for any purpose after the cessation of business, you may still allow a permitted period of up to three years, provided all letting or other usage ended less than twelve months after the business ceased.'

Therefore because the downstairs flats were (I hope!) not let, and although the period concerned is fourteen months, then Mrs R will be entitled to the relief on the sale of her shop.

It appears that in 1977 the two shops and flats above were bought under the same contract, which was the case when they were sold in July 2001. So presumably the two properties were next to each other, although this is not entirely relevant. Nevertheless, that being so, it would seem sensible to assume that each property had a 1977 acquisition cost of £10,000.

Although we are told that Mr R's dry cleaning business had a 1989 value of £20,000, I do not think this has any real bearing, as it is the property and not the business that was jointly owned. The 1989 values of both properties may be ascertained by employing the use of a professional valuer.

We have not been told the level of the disposal proceeds of the four flats in July 2001, nor whether Mr and Mrs R purchased either the leasehold or freehold ownership of the properties. This may mean that the 31 March 1982 market value will be required for Mrs R's base cost purposes, with this having an effect on the final outcome of the gain.

As the two shops and two flats were originally jointly owned, then the initial part of the capital gains calculation will be the same throughout. Again, the further use of a professional valuer may be needed to ascertain how much of the sale proceeds related to Mrs R's shop. From these proceeds should be deducted Mrs R's own base cost of either £10,000 or 31 March 1982 market value, together with the 1989 market value in respect of her 'inherited' share of the properties. - N.K.

With professional advice, a 1989 value of the joint property in 1989 can be estimated, subject to 10 or 15 per cent discounting for the joint tenancy, with a reasonable chance of later obtaining the District Valuer's agreement, depending on neighbourhood values. The local tax office should be asked to supply a form CG34. Commercial property has not matched residential property values, so the consideration finally obtained in 2001 mainly reflects planning permission (and improvements).

There appear to be eight computations required, with a rough apportionment of the sale price and the conversion costs. In the absence of losses, precise allocations are unimportant. Mrs R will have twelve years' greater indexation allowance on her original four quarter shares of £10,000 invested. The quarter shares inherited in 1989 may be kept separate or merged.

It is possible that Mrs R might be treated as commencing a property development trade in May 2000, but that is mainly a matter of timing the chargeable gains, having regard to section 161, Taxation of Chargeable Gains Act 1992.

The interval between May 2000 and July 2001 seems too great for retirement relief, since the 'permitted period' in section 163(4)(c), Taxation of Chargeable Gains Act 1992 and its paragraph 1(2) of Schedule 6, is only one year, without extension by the Revenue. There is no harm in asking, probably through an early request for a post-transaction ruling (see Code of Practice 10, Information and Advice). - Lane.

Issue: 3877 / Categories: