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TAX WITH TALLON: Letting exemption

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15th May 2006
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Paula Tallon, director of direct tax with Chiltern responds to accountants' queries.

Letting exemption
Q: My clients, a husband and wife own their main residence, Beech Cottage, jointly and are about to sell it and make a gain of £150,000 each. They acquired Beech Cottage as their main residence but moved out after one year to live in Oak Manor. Beech Cottage was let during that time. Six years later they moved back to Beech Cottage and have lived there for the last three years as their main residence. Is there any lettings relief available to them?

A: Your clients are in a good position. By owning the property jointly they qualify for double the amount of lettings exemption. I have calculated the gain for you base on the information you have given me.

 
Husband
Wife
£
£
Net Gain
150,000
150,000
PPR 40%
60,000
60,000
Relief under S223(4) limited to the lowest of
 
 
PPR £60,000 or
 
 
S 223(4)(b) £40,000 or
 
 
Gain arising by reason of letting £90,000
 
 
Applicable limit
40,000
40,000
Chargeable Gain
50,000
50,000

Just watch out for HMRC practice. Inspectors are instructed to investigate joint ownership in cases where the tax is significant before dual relief is conceded.

* * *
Unexpected cost of entering into partnership
Q: My client is an individual who owns 100% of the shares in two trading companies. He and five other individuals, who are all successful entrepreneurs with their own trading companies, have decided to get together to run a pub. I suggested to them that this should be run as a partnership as this would enable them to benefit from business asset taper relief on a future disposal, and if the pub makes a loss they would be able to offset those losses against their other income.

However, someone has told me that operating the pub in a partnership will increase the company tax bill, how can this be?

A: You have hit a familiar problem. Your rationale for suggesting that they use a partnership is reasonable looking at the pub business in isolation.

However, once the individuals become partners in the business they will become associates under section 417(3)(a) ICTA 1988. As a result, any company controlled by your client's partners will be regarded as being associated with any company controlled by your client following section 416 ICTA 1988 and following the rationale set out in the case of R v IRC, ex p Newfields Developments Limited. Section 416(6) (which deals with the attribution of rights and powers) says 'may' not 'shall 'so there is an argument that the partners interests may not necessarily be attributed. However the HMRC manual at CTM60250 includes the statement that ' You should disregard combinations containing superfluous members '. I think this is unlikely to apply in this case so the partners' companies will all be associated.

Despite the advantages you highlight for using a partnership, bearing in mind the impact of bringing together a number of companies as associated companies for small companies relief purposes, the solution could be for the pub to be operated through a limited company owned by the six individuals. On the basis that the shareholdings will be spilt equally your client will not control the company so he still only have two associated companies.

You could consider the individuals owing the pub in joint ownership, as this would maximise the taper position i.e. Business Asset Taper relief would be available. The trade would be operated via a limited company. However, don't forget the Business Property Relief implications.

This situation is a clear example of the necessity of looking at all the angles when deciding on the appropriate business vehicle for any particular situation.

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