Flat Conversion Allowances - clawback and CGT

Any specific tax issues on the disposal of a property subject of a FCA claim in 2003/4?

Didn't find your answer?

Any advice gratefully received.

A friend and I bought a disused shop in 2003 and converted it into 2 flats.  At the time, there was a special income tax relief available - Flat Conversion Allowance - for costs that would otherwise have been just CGT base cost.  This is an article for anyone not familiar.

https://www.taxinsider.co.uk/use-it-or-lose-it-flat-conversion-allowance-ta

If the property is now sold, I'm trying to establish whether:

(a) there is a clawback of income tax relief, and

(b) any reduction in CGT base cost to reflect the income tax relief given at the time.

As far as (a) is concerned, the article below says "A balancing adjustment is made if there is a balancing event within seven years of the date on which the flat was first suitable for letting." 

https://www.taxinsider.co.uk/how-to-convert-commercial-property-into-res...

A Google search indicates the legislation was in the now repealed Part 4A CAA 2001, Chapter 7 dealing with balancing adjustments.  Unfortunately, I have no access to any reference works to check!

Regarding (b), I confess I'm clueless and, again, hampered by having nothing to use to research.  If there is no clawback and the qualifying expenditure is still part of the CGT base cost, then obviously there will have been both income tax and CGT relief, which would be very nice but sounds "wrong".  For what it's worth, the total claim between us was only £15,000 so not huge amounts.

As I say, any thoughts or pointers will be appreciated.

 

Replies (8)

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By Tax Dragon
08th Jan 2022 14:33

Don't know. CGT-wise, is s39 relevant?

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Replying to Tax Dragon:
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By David Ex
08th Jan 2022 15:01

Tax Dragon wrote:

Don't know. CGT-wise, is s39 relevant?

Thanks. I’ll have a look. Should be able to access that if it’s current legislation.

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By Wanderer
08th Jan 2022 14:56

David Ex wrote:

A Google search indicates the legislation was in the now repealed Part 4A CAA 2001, Chapter 7 dealing with balancing adjustments.  Unfortunately, I have no access to any reference works to check!

Does this help:-
https://www.legislation.gov.uk/ukpga/2001/2/part/4A/2001-11-15?wrap=true

"(4)No balancing adjustment is made if the balancing event occurs more than 7 years after the time when the flat was first suitable for letting as a dwelling."

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Replying to Wanderer:
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By David Ex
08th Jan 2022 15:04

Wanderer wrote:

Does this help:-
https://www.legislation.gov.uk/ukpga/2001/2/part/4A/2001-11-15?wrap=true

"(4)No balancing adjustment is made if the balancing event occurs more than 7 years after the time when the flat was first suitable for letting as a dwelling."

Certainly does, thanks. Confirms the 7 year time limit.

Not sure why I didn’t turn that up when I did a Google search.

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By richard thomas
08th Jan 2022 15:07

With the proviso that I have only been able to see Part 4A CAA 2001 as it was originally enacted in FA 2001, and not any subsequent amendments there may have been, then it seems that the statement about the 7 year rule is correct. Section 393M(4) CAA 2001 said that:

"No balancing adjustment is made if the balancing event occurs more than 7 years after the time when the flat was first suitable for letting."

Although s 393M was repealed by FA 2012, along with the rest of Part 4A, para 42(1)(b) Sch 39 FA 2012 saves the operation of balancing adjustment provisions happening after April 2013. But that means only that a balancing event taking place after April 2013 less than 7 years after the date of suitability can be imposed - it doesn't affect cases where more than 7 years have passed.

Expenditure that falls within s 38 TCGA, as this would, is not excluded from the base cost in a CGT computation solely because CAs were given on the expenditure. But they might restrict a loss - s 41 TCGA. I think the theory behind s 41 is that if there is a chargeable gain then there must have been a balancing charge or some other adjustment clawing back the relief in a broad brush way. If there is an allowable loss then a complex adjustment may be needed under ss (2) to (10).

Intriguingly (for me at least) I note that Sch 39 FA 2012 was the result of the OTS' review of tax reliefs and I was involved in that. That Schedule also abolished life assurance premium relief but prospectively - and it has never come into force. I might make an FoI request to find out why.

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Replying to richard thomas:
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By David Ex
08th Jan 2022 16:07

richard thomas wrote:

Expenditure that falls within s 38 TCGA, as this would, is not excluded from the base cost in a CGT computation solely because CAs were given on the expenditure. But they might restrict a loss - s 41 TCGA. I think the theory behind s 41 is that if there is a chargeable gain then there must have been a balancing charge or some other adjustment clawing back the relief in a broad brush way. If there is an allowable loss then a complex adjustment may be needed under ss (2) to (10).

Intriguingly (for me at least) I note that Sch 39 FA 2012 was the result of the OTS' review of tax reliefs and I was involved in that. That Schedule also abolished life assurance premium relief but prospectively - and it has never come into force. I might make an FoI request to find out why.

Thank you. Again, very helpful. There would be a gain, albeit a modest one!!

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By Paul Crowley
09th Jan 2022 16:43

I remember this allowance, had a client who had claimed on company A with company B doing the conversion as contractor.
Still a client

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Replying to Paul Crowley:
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By David Ex
09th Jan 2022 21:00

Paul Crowley wrote:

I remember this allowance, had a client who had claimed on company A with company B doing the conversion as contractor.
Still a client

Nothing like that in my case!!

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