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Readers' Forum - A five-year plan

07 July 2005
Issue: 4015 / Categories:

A five-year plan

David and Hugh operate their profitable partnership from two office buildings, one owned by them (since before 1998) and one rented from a third party. The landlord of the rented office has agreed to provide additional space in the same building so that the whole operation can then be under one roof. However, they do not wish to sell the owned building (currently standing at a profit before taper relief of £100,000) as a restrictive covenant is due to expire in five years' time, after which the property could perhaps be sold at a profit of about £500,000.

A five-year plan

David and Hugh operate their profitable partnership from two office buildings, one owned by them (since before 1998) and one rented from a third party. The landlord of the rented office has agreed to provide additional space in the same building so that the whole operation can then be under one roof. However, they do not wish to sell the owned building (currently standing at a profit before taper relief of £100,000) as a restrictive covenant is due to expire in five years' time, after which the property could perhaps be sold at a profit of about £500,000.
One of their major clients (not an unlisted trading company) has offered to utilise the surplus space in the meantime, but proposes — while occupation of the office continues — simply to annually renew an existing consultancy contract with David and Hugh which was due to lapse, rather than pay rent and be tied into a lease, and the whole arrangement seems quite informal and flexible. David may indeed continue to use one of the offices from time to time as he lives nearby.
I am concerned that, notwithstanding the lack of a lease and proper rent, the property could lose its business asset status for taper relief such that the taxable gain in five years' time would be considerably higher than if the property was sold now, even if there is no increase in value during that time.
Are there any steps which can be taken to eliminate or mitigate the problem?
Query T16,639                                                 — Tapir.


We are not told why Tapir thinks that the building could lose its status as a business asset for taper relief purposes if it is to be occupied (or part occupied) by David and Hugh's client. Tapir is correct that it is the use to which the asset (in this case the building) is put and by whom, which will determine its status at that time. Whether or not there is a formal lease with the potential new occupier is not, in itself, important.
It may be that a lease will evidence the use and so if there is no lease in place (say, there is just an informal licence to occupy), Tapir should advise his clients to retain alternative evidence of the use made of the property.
We are told that the client is not an unquoted trading company. However, this is not the only condition for an asset to qualify as a business asset for taper purposes. The building will qualify as a business asset for taper relief when it is used wholly or partly for one of the following:

  • any trade carried on by a company which at that time was a qualifying company by reference to that individual (or a member of a trading group of which the holding company was such a qualifying company by reference to the individual);
  • any office or employment held by that individual with a person carrying on a trade; or
  • a trade carried on by that individual or by a partnership of which that individual was a partner.

However, Tapir should be reminded that FA 2003 amended the definition of a business asset in a subtle, but significant, way. From 5 April 2004, the trade in which the asset is used no longer need be carried on by the individual or a partnership of which the individual is a member. Instead, the trade may be carried on by any individual (either alone or in partnership). Therefore if the client is not incorporated, and is engaged in a trade or profession, the asset will continue to enjoy business asset status.
If the problem is that the client is incorporated, but is a quoted company, then a solution would seem to be to ensure that the company is a qualifying company for David and Hugh. If the company is a trading company, then the simple expedient of David and Hugh being made either officers or employees of the company will do the trick (TCGA 1992, Sch A1 para 6(1)(b)(ii)). In fact, a quoted company does not even have to be trading in order for it to be a qualifying company for an officer or employee of the company, so long as there is no 'material interest' shareholding (Sch A1 para 6(1A)).
The relationship with the client seems relatively informal and flexible; perhaps a sinecure of a job can be arranged? In fact, if the owner of the asset is not an employee (or officer in the case of a company), the only circumstances where the use made by the client will not qualify as a business asset will be if the client is unincorporated and not carrying on a trade, profession or vocation, or if it is a company, then it is unquoted and not a trading company. In such a case, and if it were to be sold in five years' time, there will be mixed use in the relevant period leading to an apportionment of the gain into two periods of five years each. With a qualifying holding period in excess of ten years, maximum business asset and non-business asset taper relief will apply to each gain respectively, giving an effective rate of 57.5% taper to each partner's share of the capital gain.
Tapir mentions that one of the partners, David, may continue to use one of the offices, presumably for the purposes of his trade or profession. There will then be both business and non-business use, i.e. mixed use in that period. The gain attributable to this period must again be notionally split into a business and a non-business asset gain, in proportion to the use made of the asset in that period. The apportionment is to be made on a 'just and reasonable basis', but where the apportionment is by time, the gain is assumed to have accrued evenly over the period. In this case, the fraction might be on the basis of the floor area of the offices used for each purpose. The effect of this will be to increase the overall effective rate of taper relief on the future gain.                                       

Issue: 4015 / Categories:
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