I have a hypothetical question, which I have been unable to find the answer to anywhere.
Let's say that a client is considering converting a commercial building into a residential premises, which may be sold in 5 years time.
Where a business makes a gain on an asset that is used in the business for only part of the period of ownership, the gain must be apportioned, with only the part that relates to the period of business use eligible for relief. Simple enough.
So, let's say:
Commercial building constructed 1/1/2004 at a cost of £50,000
Business use ceases 1/1/2014
Conversion costs to residential property of £100,000, all post 1/1/2014.
Residential premises sold 1/1/2019 for £350,000.
The gain overall is £200,000.
Logic would imply that the market value before the conversion work begins would need to be taken into account, so that the conversion costs (incurred after business use ceases) are not, partially at least, set against the period when it was a commercial building. If it was worth, say, £100,000 on 1/1/14, then there would be a gain of £50,000 relating to the period before business use ceased, and £150,000 for the period after is ceased.
I have been unable to find anything in legislation, HMRC guides, or articles to back up the above.
I would be grateful if anyone could point me in the direction of a definitive answer!
Many thanks.
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No rollover relief
because it isn't going to a building used and occupied for the purposes of the trade at the date of disposal.
Not according to this HMRC example
To be honest, I was thinking the same as you, until I came across the example in CG60520, which shows relief available on a building that wasn't used or occupied in the trade for the last two years of ownership.
Sorry, I can't get the link to work for some reason.
Interesting. So it does.
Last time I looked at this was some years ago when I found a Tax Digest which said ( rather tentatively ) that no relief was due in this situation.
Anyone else?
Trading?
Have you looked at the conversion properly?
A lot of this is academic if the conversion gain ends up being trading income.
Deemed disposal
At the time the trade ceases and the development of the property commences, there is an appropriation of a fixed asset to trading stock, giving rise deemed disposal under TCGA 1992, s. 161(1).
The deemed disposal proceeds are market value.
If in your example the market value of the commercial premises on 1/1/2014 were £100,000 you would have a gain of £50,000, all of which can be rolled over if you reinvest £100,000.
Your trading stock is then £100,000 you add costs of £100,000, giving total costs of £200,000, and when you sell for £350,000, you have a trading profit of £150,000.
Alternatively, you can elect, under s. 161(3) for s. 161(1) to not apply. In that case, the cost of your trading stock is £50,000, you add costs of £100,000, giving £150,000 in total, and when you sell for £350,000, you have a trading profit of £200,000.
You can't rollover any of the £200,000 though, because it is a trading profit and not a chargeable gain.
Where you have a gain on a chargeable asset that was used for the purposes of a trade for only part of the period of ownership, s. 152(7) does make provision for the part of the gain attributable to the trading period being eligible for rollover relief though.
EDIT: Martin beat me to it. If the intention when development of the residential property commenced was to sell it in order to realise a profit, you will have a hard job arguing that it isn't trading.
But
Did the trade cease? And does the conversion take the fixed asset of the trade into trading stock?
If the intention is to convert a single building to hold and let { and possibly sell on in some years time }, then I should be slow to reckon that there was a development or dealing trade?
Thank you for the replies, they are most helpful.
Just to throw another idea out there then, let's say the intention was to keep the property and rent it out, with no plans to sell it. The original trade continues as normal.
As that would be property income rather than being classed as a trade, then the transfer into stock cannot take place. What would be the situation in that case?
I fear that I've reached the point of not being able to see the wood for the trees! Still, it'll soon be the weekend!
If that is scenario hornet boy, then the property remains a fixed asset of the trade, albeit no longer used and occupied for a trading purpose. There is then no disposal under s161.
Should the building be subsequently sold, having been let from now on until the date of disposal, then we come back to your original question. Is rollover relief due and, if it is, what proportion of the gain is eligible for such relief?
My Yellow Books tell me that a case on s152(7) is Richart v Lyons. Perhaps take a look at that to see whether it sheds any light on the point?