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I act for a client who owns an investment property as a joint tenant with his mother. The property consists of four self-contained flats on two floors; these are let to tenants on shorthold leases. My client has recently obtained planning permission to remove the existing roof and to construct a further unit at the top of the building (which, incidentally, Customs and Excise have agreed should be zero rated).
I act for a client who owns an investment property as a joint tenant with his mother. The property consists of four self-contained flats on two floors; these are let to tenants on shorthold leases. My client has recently obtained planning permission to remove the existing roof and to construct a further unit at the top of the building (which, incidentally, Customs and Excise have agreed should be zero rated).
The cost of these works and other general improvements to the property, including the creation of four parking spaces, three of which will be used by the tenanted flats, will be borne exclusively by my client. It is proposed that my client and his mother will grant a long lease of the new unit to my client in consideration for which my client will undertake to carry out specified improvements to the property and to pay his mother a capital sum.
I assume that the consideration should equate to the value of the right to build the unit were the lease to be offered to any third party, taking account of the lease terms and the cost of the improvement works. The length of the lease has yet to be determined. As my client is already joint owner of the property, am I right in assuming that my client will be free of CGT on his notional share of any capital improvement?
Readers' views and comments would be appreciated.
(Query T16,569) — Bob the Builder.
A leasehold is a separate estate in land from the freehold reversion. It is therefore a separate legal asset even though encompassed in the same physical asset. By reason of TCGA 1992, s 21(1), it is the former which has to be looked at for this purpose.
It would follow from this that the son could not treat the grant of the lease as being of a 50% share in it by his mother alone. He would have to declare the same value by way of disposal as her.
The obligation to pay the builders is part of the lease 'premium' and would be treated as having been received as to half each. While the cash element would be paid to the mother alone, the effect of TCGA 1992, s 18(2) would be to treat the son as having then been entitled to an equivalent amount.
The total value so calculated would be treated as a part disposal of the whole block under the A/A+B formula in TCGA 1992, s 42(1). The value of the retained property would include not only the (unaffected) reversions to the short leases of the existing flats, but also to that expectant upon the determination of the term of the new flat (in fact the lease of that could not, in practice, be granted before the completion of its construction).
However, it may be possible to reduce the amount of stamp duty land tax payable by having a contract under which all the works are carried out: see FA 2003, Sch 4 para 10(2A). This would, of course, be at the cost of accelerating the date of disposal for capital gains tax: see TCGA 1992, s 28(1).
If the builder can be induced to keep to the timetable (which cannot of course be guaranteed), then, by arranging for the contract to be entered into after 5 April, this may not affect the payment date for CGT.
As far as the length of the lease is concerned, it should be for over 50 years from the date of eventual grant in order to avoid both the mother and her son then being visited with a Schedule A short lease premium charge under TA 1988, s 34.
There is one further problem area. Although this seems unlikely from the existence of a joint tenancy, if the property was purchased after 1985 by the mother and son with a view to letting it through an agent, then the Financial Services and Markets Act 2000, s 235 seems to have turned their investment into an unauthorised unit trust. TCGA 1992, s 99(1) treats this as a company, albeit subject to capital gains tax (rather than corporation tax) on chargeable gains. The 'unit holders' would then be subjected to a second tranche of CGT on ultimate realisation. Needless to say, under this scenario, there would not even be the conceptual possibility of the son treating his half share as a 'nothing'.
