Capital gain - FHL and BADR

Is time apportionment required or is all the gain subject to BADR?

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Mixed use asset history. Is time apportionment required?

Client acquired a domestic property in 2012.  The property was used for family visit purposes until July 2015, when it was let under qualifying FHL rules.  The FHL activity ceased in November 2019 and the property has recently been sold.  There are no other let properties. 

On the basis that it was owned and let as a FHL for at least 2 years ending on the date of cessation (of the business) and it has been sold within 3 years of the cessation of the FHL I think that the whole Capital Gain will be subject to BADR, without apportionment?

It seems generous to be able to own a property for any length of time for it to be “blessed” by the final 2 years of letting as a FHL.  On the flip side, if it was let as a FHL for an extended period and then ceased to qualify for FHL before cessation of the business, the sale apparently wouldn’t qualify for BADR?

Is my understanding correct?   

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By richard thomas
02nd Dec 2022 14:12

It does seem generous, and probably derives from the failure of HMRC to consider that FHL is a special status that can vary from year to year or can (as in my own case) only apply to a holiday letting after a long period in which lettings build up to a qualifying level or there is a deliberate change in the way the asset is used, something that does not usually happen in the normal trading situation.

However it is clearly the effect of s 169I(3) TCGA that as the letting qualifies as FHL in those two years full relief is available. (S 169I must hold the record for being the most unwieldy section still on the statute book, and shows again why it is deplorable that TCGA was not rewritten entirely in the Tax law Rewrite mode - 28 subsections!)

There is though a cloud on the horizon. An asset is not a qualifying business asset and so within BADR if it is an investment - s 169L(4)(b). "Investment" is not so far as I can see defined for the purposes of BADR and certainly not generally for CGT. On the basis of the IHT cases for business relief there must be a strong case for saying that any dwelling exploited as a source of rents is an "investment" and so not within BADR. If that is so, though, the obvious counter-argument is "well then, why is s 169S specifically mentioned in s 241 TCGA if a holiday let will never qualify for BADR?". But an argument from a redundancy is not a strong one. Arguing that the situation is in the legal sense "absurd" is more promising. As so often the CG Manual does not cover this point, merely paraphrasing the law, but the IHT Manual and the cases mentioned in it are ominously clear.

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Replying to richard thomas:
By spuddle
02nd Dec 2022 16:39

Thanks for your input Richard. Very useful.

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