Is there CGT on offer made to vacate a property?

Is there CGT on offer made to vacate a property?

Didn't find your answer?

Hi,

Wondering if any one is able to put me in the right direction. A client contacted me for some information. The basics of the situation is as follows:

  • A client have lived in the same rental property for 35+ years.
  • The landlord sold the land and buildings to a construction company with the client still living there. The client are tenants in situ. I think from what they were saying to me is that they have been living there so long now, they cant be removed.
  • The construction company has approached the client and made them an offer for them to leave the property in order for it be demolished and then new houses built on it.

My question is, will CGT be payable on the amount received to vacate the property? 

I have looked at guidance on it and what I have been reading mainly applies to businesses surrendering a lease. In the case above, it is not a business but standard residential property. The client has not accepted the offer.

Any help would be greatly appreciated.

Replies (22)

Please login or register to join the discussion.

avatar
By Hugo Fair
12th May 2022 16:00

I'm sure that far wiser and more experienced people will come along - but my initial reaction is ... doesn't CGT only apply where the sale of the asset (now being sold) was acquired at a cost (purchased) in the past?
It sounds to me as though the offer being made by the construction company is more a form of compensation than a sale of anything ... but this isn't my area!

Thanks (2)
Replying to Hugo Fair:
avatar
By More unearned luck
12th May 2022 16:21

My unconsidered response is the the lease is a chargeable asset and therefore a chargeable gain arises. The fact that there was a nil cost is neither here nor there. The Sid's of this world were given free BG shares which gave rise to chargeable gains if they sold their shares. And, of course inherited assets and inter vivos gifts have not been acquired at a cost., although the law deems there to have been a 'cost' .

My further unconsidered response is that the gain will be covered by PRR.

Thanks (3)
Replying to More unearned luck:
avatar
By The Dullard
13th May 2022 10:25

+1

Thanks (1)
avatar
By Hometing
12th May 2022 16:30

Are there any terms to the offer? ie. could it be construed as compensation, rather than income?

If not, I would imagine (without looking into it) that it's more likely assessable as other income than capital.

Thanks (1)
avatar
By bernard michael
13th May 2022 09:39

What are the written terms under which they occupy the premises ?? They may give a further clue

Thanks (1)
avatar
By richard thomas
13th May 2022 10:34

The client clearly owns an asset, a tenancy which is I assume is for life, like council house tenancies are (used to be), and not at a rackrent.

Surrendering it to the landlord is a disposal of the asset (s 22(1)(c) TCGA 1992). As has been noted there will be no cost, and that does not affect the fact that there is a disposal, nor does the fact that the asset disappears on surrender (see the proviso in the chapeau of s 22(1)).

Thus there is a gain equal to the sum paid. Does PRR apply? Why not, as s 222(1) ibid. refers to "the disposal of, or of an interest in .. a dwelling house"?

If the tenancy is for life and the client is not at death's door then the sum received for giving up a valuable and long-lasting assets is clearly, in my view, a capital sum, and only subject to income tax on the basis of a statutory provision.

The premium etc rules in Part 3 ITTOIA do not apply here as they relate to receipts by a landlord, not a tenant (see esp. s 280(1)).

The "reverse premium" rules in ss 99-103 and 311 ITTOIA came to mind, but they require that the tenant enters into a new or revised tenancy.

They were introduced as readers may remember, to tax incentive payments by landlords, desperate to fill shopping centres with anchor tenants, to prospective tenants who would sign up and to existing tenants to stay.

Thanks (5)
Replying to richard thomas:
avatar
By ShoulderShrug
13th May 2022 12:16

Thank you for your response. Very informative. They were paying market rent but effectively had the right to live there hence the offer to get them to move out.

You have given me what I need to go back to the client. I will also look in more detail to see if PPR applies on it.

Thank you

Thanks (0)
By ianthetaxman
16th May 2022 10:16

I think you would need to quantify exactly how/why the tenant has a right to occupy outside of a 'normal' lease arrangement, as the property is now owned by the developer. Has the lease been changed into the name of the new owner? What does it say about terminating the lease?

If there is some right to occupy outside of a lease being in place, might the HMRC reference to compensation not be appropriate? I wonder then whether the suggested payment is a chose in action, the receipt of a capital sum derived from the disposal of a right to something, rather than the sale of the underlying asset.

If so, PPR is not available, as the tenant doesn't own the property?

Thanks (0)
Replying to ianthetaxman:
avatar
By Justin Bryant
16th May 2022 11:10

Rubbish. RT has answered correctly above.

Thanks (0)
Replying to Justin Bryant:
By ianthetaxman
16th May 2022 11:43

That's a bit harsh?

The OP doesn't state that the developer has issued a licence/lease/rental agreement to the individuals occupying the property, nor do they state what agreement was made whether verbal or otherwise with the new owner.

All I was pointing out if that if the tenant has no interest in the property then how can they be disposing of said interest? And if that were the case, are they then disposing of the right that they seem to think they have to occupy (which also isn't quantified by OP) instead?

Thanks (0)
Replying to ianthetaxman:
avatar
By Justin Bryant
16th May 2022 11:50

It is well known that s222 applies to rented residential property just as much as non-rented (i.e. owner occupied) property is my (and RT's) point (e.g. PPR nominations can be made re rented property). There are all kinds of other similar rights of occupation that it will equally apply to.

Thanks (0)
Replying to ianthetaxman:
paddle steamer
By DJKL
16th May 2022 11:58

Surely would not matter- the previous lease/licence remains in place irrespective of change of ownership of the overall site, the new owner merely steps into the shoes of the old one. Certainly in Scotland no new lease from new owner to old tenant is required (though one might be desirable) nor can the tenant be forced to sign same, his/her tenure is surely undisturbed by the change of ownership..

Thanks (0)
avatar
By chronus
16th May 2022 10:43

It would appear your client has received an offer to dispose of his interest in a residential property occupied by him as his main or only residence. Accordingly the usual rules for disposals in such assets would apply.

Thanks (0)
Replying to chronus:
avatar
By Arbitrary
16th May 2022 14:04

Agreed. Simple and clear. No need for technical complexity.

Thanks (0)
avatar
By girlofwight
16th May 2022 11:07

I had a similar case a few years ago, my client had a lifetime tenancy in an agricultural tied cottage. Farmer wanted to pay a premium to get my client to move out.

After some exchange of correspondence HMRC agreed that "interest in" applied from TCGA 1992 S222(1) "This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in ..."

My client obtained PPR. This was post Self Assessment, so I must have gone through some form of clearance with HMRC but it was a good 15 years ago so not sure what the route was.

HTH

Thanks (0)
avatar
By fawltybasil2575
16th May 2022 12:28

@ ShoulderShrug (OP).

One cannot give a categorical answer to your initial question (this is no criticism of that question, express or implied) without knowing both the specifics of the offer and more importantly of the formal written agreement which will necessarily be required in due course.

However, one must FIRST “take a step back” in any event. To explain, it is probable that the “offer” received is no more than that; in intending no offence to construction companies, frequently they will put forward “offers” which substantially understate the value of the right which they are seeking to acquire.

The most important action which the client should take, when receiving any offer, is to contact (I am of course assuming that they have not already done so) a Chartered Surveyor/Development Consultant who can advise whether the offer should be accepted – substantial monies could be at issue if the property’s demolition (by the construction company) could massively increase the site profitability. In short, does your client know for certain whether the offer (say this is £30k) is substantially too low, and that £180k is not a more appropriate figure (any tax liability would, if so, pale into insignificance) ?

You do not state (again no criticism intended) whether there are other persons “in the same boat”, to whom offers have been, or might be, made.

Experienced Development Consultants would themselves have adequate knowledge of the taxation implications. A competent solicitor should be able to advise of the taxation consequences of accepting any offer (and, if appropriate, might ensure that a clause is inserted in the agreement effectively “guaranteeing” that no CGT would be payable by your client).

Basil.

Thanks (0)
Replying to fawltybasil2575:
paddle steamer
By DJKL
16th May 2022 12:41

Ransom strips, if that is what this is, can be wonderfully lucrative things, Basil's advice here is very sound though he is somewhat taking the bread out of the mouths of us developers.

Thanks (0)
Replying to fawltybasil2575:
avatar
By The Dullard
16th May 2022 12:57

Interesting new variant of the solicitor oxymoron, Basil.

Thanks (1)
avatar
By Homeworker
30th May 2022 13:31

Surely it would be covered by private residence relief if they have always lived in it, so no additional research is needed.

Thanks (0)
avatar
By Tax Dragon
30th May 2022 13:40

"The client has not accepted the offer."

No tax then.

As I was going to St Ives....

Thanks (0)