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Taper tantrums

I have a client who sold his remaining share in a property on 30 April 2004, making a gain of approximately £100,000. Originally, from April 1982 to 30 June 1983, the property was his main residence; it was then used partly for business purposes (one-third from July 1983 to 31 December 1988 and three-quarters from January 1989 to 4 June 1992) and finally (from 5 June 1992 until sale) it was used wholly for business purposes.

I have prepared a capital gains tax calculation, but am not certain that I have calculated the taper relief correctly. I am particularly confused regarding the interaction of the last three years' private residence exemption and my client's entitlement to business asset taper relief and would appreciate readers' comments and advice.

(Query T16,447) — MET.

'MET' does not mention whether the parts of the property were used 'exclusively' for business use, but this is assumed to be the case. Section 224(1), Taxation of Chargeable Gains Act 1992 requires the gain to be apportioned between the parts of the property used as a residence, and the parts used for business. The Revenue indicates that occasional and minor business use can be ignored.

Malcolm Gunn's excellent article, 'Splitting Up The Home' (see Taxation, 7 August 2003 at page 506) summarises all the relevant issues. Section 223(2), Taxation of Chargeable Gains Act 1992, which is the three-year extension to principal private residence exemption, applies in 'any event,' and at paragraph CG64765 of the Revenue's Capital Gains Tax Manual, principal private residence relief is deemed to be available for any part of the property which has at some stage been part of the owner's only or main residence, regardless of the actual use in those last three years. From 'MET's' description, the whole property was the main residence for 15 months, thus the three-year exemption should be available. However, the Revenue may challenge this given the relatively short period of exclusive main residence use.

Section 224(2), Taxation of Chargeable Gains Act 1992 requires any apportionment to be made on a just and reasonable basis, and the Revenue often prefers a time basis, which I have used. (The Revenue treats each case on its own merits.)

For the purposes of principal private residence relief, the property was owned for 22 years and 1 month, i.e. 265 months.

The property ceased to be used as an only or main residence from 5 June 1992. The last three years of ownership are taken as being exempt under section 223(2), Taxation of Chargeable Gains Act 1992.

Dates Total Main Business

residence

(months) (months) (months)

1 April 1982 to

30 June 1983 15 15

1 July 1983 to

31 December 1988 66 44 22

1 January 1989 to

4 June 1992 41 10 31

5 June 1992 to

30 April 2004 143 36 107

Total 265 105 160

Taper relief does not usually interact well with principal private residence relief, although in this case, given the business use in the latter period of ownership, it would appear that business asset taper relief is available for the whole gain left in charge after principal private residence is applied. (Paragraph 9 of Schedule A1 to the Taxation of Chargeable Gains Act 1992 requires the gain to be apportioned to reflect the use of the whole property since 6 April 1998.)

So the computation could proceed as follows:

£ £

Total gain 100,000

Portion for PPR: 105/265 (39,623)

Gain left in charge — pre taper relief 60,377

Gain after business asset taper relief 15,094

This is obviously a very good result, although 'MET' should be able to substantiate all dates and property use in the event of a Revenue enquiry.

It is also interesting to note that the client sold a 'share' in the property, which suggests joint ownership. Obviously each vendor will benefit from the annual exemption. 'MET' should also consider rollover relief, which should be possible to claim if the client is reinvesting in a new property, part of which will be used for business purposes. Capital losses of course would also mitigate the gain.

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