A husband and wife bought a leasehold flat in 2013 for £500,000, as tenants in common, with the husband owning 99.9% and the wife 0.1%. They lived in the flat as their main residence for the first two years, after which it has been let out.
In 2017 they participated in a ‘collective enfranchisement’ of the building of which the flat was part. This involved a new company being incorporated (owned by the leaseholders in the building) to acquire the freehold interest. Under the terms of a Participation Agreement between the leaseholders and the company, each leaseholder was responsible for paying the share of the acquisition of the freehold interest (plus share of other costs) that was attributable to their flat, and the company undertook, once the freehold interest was acquired, to accept the surrender of the existing leases and grant each leaseholder a new 999 lease at a peppercorn rent, in respect of their flat. Each leasehold also subscribed for a £1 share in the company at par value.
The costs attributable to the flat in question were £10,000, which was paid directly by the leaseholder (on behalf of the company) as their share of the costs of acquiring the freehold. A few months after the company acquired the freehold, the surrender and re-grant of the lease was completed (in accordance with the Participation Agreement).
The conditions for ESC D39 appear to be met. In particular, the transaction should be regarded as being on arm’s length terms; the company acquired the freehold interest (with all costs being borne by the leaseholders) subject to the obligation to grant new 999 year leases over all flats in the building – hence there was negligible residual value in the freehold interest. And the costs borne by the leaseholder were the result of a negotiated settlement with an unconnected third party.
The wife (0.1% owner) intends to file her tax return on the basis that ESC D39 applies and there was no disposal of the leasehold interest on the occasion of the surrender and re-grant.
However, the husband (99.9% owner) intends to file his tax return on the basis that he does not wish to avail himself of the concessionary treatment and that a chargeable disposal occurred as a result of the surrender and re-grant, with consideration being the market value of the new 999 year lease – estimated to be £750,000. The gain of £250,000 is expected to be fully covered by Principal Private Residence Relief (including the final 18 months before the disposal) and Letting Relief.
The husband would then have CGT base cost of £750,000 in the property, on the basis of the market value at the time of the surrender and re-grant.
Now, suppose the flat is then sold in 2020 for £900,000, and immediately before the sale, the husband transfers his 99.9% share to the wife. It is treated as a nil gain, nil loss transfer and the wife would therefore have CGT base cost in the property of £750,000. Furthermore, the wife would still be able to claim PPR and Letting Relief on the £150,000 gain, based on her full period of ownership of the property, since 2013 (since as a result of ESC D39 no disposal is deemed to have taken place of her 0.1% share in 2017).
Crucially, under s222(7) TCGA 1992 the period of ownership, where an individual has had different interests at different times, is taken to begin from the date of the first acquisition. Furthermore, s222(7)(a) would not apply, since at the time of the transfer of the 99.9% share to the wife, it is not the husband’s main residence – and has not been his main residence at any point since his acquisition of it (at the time of the surrender and re-grant of the lease).
The effect of the legislation appears to be that in this case the husband and wife can effectively get both a tax-free rebasing for CGT to market value in 2017 and PPR relief (pro rata) based on the full period of ownership from 2013 when the flat is eventually sold.
Any thoughts on whether this analysis is correct, or any other comments on this fact pattern would be much appreciated!