A taperful acquisition?
My client has occupied the same business premises for over 50 years. At one time he paid rent, but has not done so for over 35 years. Action is being taken to obtain adverse possession and is likely to be successful.
A taperful acquisition?
My client has occupied the same business premises for over 50 years. At one time he paid rent, but has not done so for over 35 years. Action is being taken to obtain adverse possession and is likely to be successful.
The value of the property obtained will be approximately £500,000 and it is my client's wish to sell as soon as possible. (Having been in business for 50 years, he now wants to retire!) Presumably the base cost will be £nil, but when does entitlement to capital gains tax taper relief begin? He has occupied the property for more than a lifetime, but will taper begin when he commenced legal proceedings, or only from the date of any court order?
As one would expect, the business is not as substantial as it was, but will we need to keep it going for the next two years?
(Query T16,136) - Worn Out.
The Inland Revenue's view has always been that for the various death duties, fully run adverse possession claims fall to be returned as assets. In the current code, the definition of 'property' in section 272, Inheritance Tax Act 1984 includes 'rights and interests of any description'.
If the same position pertains for capital gains tax, then, the twelve-year period having expired in 1981, the claim will have had a 31 March 1982 open market value (albeit not as high as that of the underlying land - not least because a prudent purchaser would probably be somewhat wary of the fact that possession was originally obtained in a rent-paying tenant capacity), by virtue of section 35(2), Taxation of Chargeable Gains Act 1992. This will, furthermore, have carried full indexation until April 1998, under sections 55(1) and 53(1A).
As and when the claim is converted into legal ownership, it will have 'changed its nature' and, in consequence, be subsumed into the legal ownership by virtue of section 43. This will also be the same for taper relief ownership purposes, by virtue of paragraph 14(1)(b) of Schedule A1.
The legal costs incurred in establishing legal title will be allowable in addition, under section 38(1)(b).
The key issue which must be resolved is, therefore, whether what constitutes 'property' for inheritance tax purposes is also a 'form of property' for capital gains tax purposes. Once that has been established, section 21(1)(c) of the 1992 Act is clearly sufficiently wide to encompass acquisition through adverse possession. While there is no case law directly in point, it seems difficult to envisage the courts declining to recognise an adverse possession claim as a 'form' of property when the House of Lords has held, in O'Brien v Benson's Hosiery (Holdings) Ltd [1979] STC 735, that an employer's rights under a contract of employment fall within that concept.
It seems, therefore, that the client will be entitled to offset against the gain on sale over double the 1982 value of the claim, tapered on the basis of being owned as at 16 March 1998. - JdeS.
The position is if the ownership of an asset is transferred by order of the courts, then it is the date of the court order that is effective for ownership of the successive person concerned, for capital gains purposes at least. (See the Revenue's Capital Gains Manual at paragraphs CG22410 and CG22420 to 22425 - and although these refer to separated or divorced husband and wife transfers, they are still valid in this case).
Therefore in respect of the premises concerned, which in this case is a business asset, the 'Period for which an asset is held and relevant period of ownership', is as per section 2, Taxation of Chargeable Gains Act 1992.
'(1) In relation to any gain on the disposal of a business or non-business asset, the period after 5 April 1998 for which the asset had been held at the time of its disposal is the period which -
(a) begins with whichever is the later of 6 April 1998 and the time when the asset disposed of was acquired by the person making the disposal; and
(b) ends with the time of the disposal on which the gain accrued.
(2) Where an asset is disposed of, its relevant period of ownership is whichever is the shorter of -
(a) the period after 5 April 1998 for which the asset had been held at the time of its disposal; and
(b) the period of ten years ending with that time.'
Therefore the two years of ownership before the premises disposal will be needed in order to qualify for the full 75 per cent business asset taper relief.
Because, technically, the situation here is that following the likely successful action, the premises will have been acquired without presumably a corresponding disposal, then under section 17(2) the smaller of actual consideration or market value will be used for cost purposes, which, as 'Worn Out' suggests, will be £nil.
The position is also covered in 'Assets acquired for deemed consideration', under C2.204 of Simon's Direct Tax Services. - N.K.
Editorial note. Most readers agreed with 'N.K.'s' view, but the argument of 'JdeS' for an earlier time of acquisition appears to be supported by section 15(1), Limitation Act 1980 which states:
'No action shall be brought by any person to recover any land after the expiration of twelve years from the date on which the right of action accrued to him or, if it first accrued to some person through whom he claims, to that person.'
At the expiry of that period, it is understood that the owner's title to the land is extinguished, unless the land is registered land. In that latter case, the title is not extinguished, but the owner holds that property on trust for the 'adverse possessor' who is entitled to be registered as the legal owner.