3 siblings jointly own various investment properties in various locations. They wish to develop some of this property (all property in one location i.e. one site) and therefore appropriate it from fixed assets to stock in a new property development business.
The capital gain can, I understand, be held over on appropriation so in effect the trading stock has the same original cost as when first acquired as investment property. If the siblings wish to incorporate the property development business what value does the opening stock have and does incorporation trigger the gain?
Alternatively can the gain be avoided by using incorporation relief by saying the properties in one location constitutes one separate business (& hence all the assets in this business are being transferred to Newco)?
Replies (10)
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Slightly lost here but I think what you are saying is that the three, as individuals, currently jointly own a property (one of a number) that has previously been used(maybe still is) as an investment property. How do they hold these interests, as a partnership?
You are then suggesting possibly appropriating to trading stock the current investment property which should be done at market value but with the option to elect that the gain is heldover into in effect the carry cost of the stock when later sold.
There may be scope to try incorporation relief of the existing business under section 162 but that would require there to actually currently be a business? I would also consider that to make that test all properties would require to transfer (the business, see below) and that the level of activity running the properties would have to be enough to argue there was a business (Ramsey) Once the gains rolled into the shares of the company you might be able to appropriate the single property to trading stock, however not sure why one would really want to do all this unless it is to get the development profits into a lower tax vehicle. However currently at 28% as against 20% and within company with the eventual post tax funds having an extraction cost. The last appropriation step seems redundant- once in the company do you care if trading or chargeable gain (except re ER relief on the shares, but with other properties may be difficult)
If the current business is a partnership and you appropriate to stock and .develop and sell without incorporation then you possibly pay tax at 40% (45%) rather than say 28%, I am having difficulty seeing what is the purpose.
I am really not keen on the idea that one property in one location is a business for incorporation relief, however others on here are far more experienced than I re this point.
For a start re further information what accounts are currently prepared for the three of them, is there a partnership?
I think
You need expert advice here. Chargeable gains have got nothing to do with property held as trading stock (that is a revenue item). Is not s178 ITTOIA 2005 the relevant relief here?
But what's relevant to the question
Is whether a s178 election carries through any s161 election (rollover) value (I assume it does) and 162 incorporation relief is totally irrelevant. - unless they simply incorporate the property investment business (per Elizabeth Ramsay), but then there will be MV uplift and so no need for 161 election if then appropriating to trading stock.
I agree, Justin
I was simply responding to your statement that chargeable gains have nothing to do with property held as trading stock, which is clearly incorrect. In the case of a s161 election, the amount of the chargeable gain 'held over' is very relevant to the calculation of trading profit on disposal of the property.
Interaction
I think that the fact that section 178 refers to "acquisition value" (which then has a definition), rather than cost tells you what the interaction is. Note that the definition of "acquisition value" aligns itself nicely with the final 20-odd words of section 161(3).
Note also that section 178 only applies where the stock is sold by one connected party to another.