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Tax on sale of commercial premises

Income tax or CGT

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Mr A has owned a commercial permises for 20 years over which preiod it has been rented out as such.

The lease is coming to an end and the tenenant will not be re-newing.

Mr A is of retirement age and doesn't want the hassle of owning rental property so decides to sell.

He can get a better price if he gets planning permission to turn the property into 4 flats.

How will this be taxed.

My thoughts are there will be CGT at 10/20% on the difference between cost and the value prior to planning permission and any uplift in value following planning permission will be taxed as income at marginal rates as the intention has changed and so Mr A has changed from investor to property developer.

Is this correct?

I am looking at BIM60560 as my primary source

Many thanks in advance.

 

 

 

 

 

Replies (7)

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By Vaughan Blake1
15th Oct 2019 15:14

I would say that it is all a capital gain. The property was not acquired with the intention of doing anything other than being a rental property.

Mr A has not 'developed' the property, in that he has not changed the property in any way, but has merely obtained planning permission.

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By SteLacca
15th Oct 2019 15:27

I concur. I see nothing in the circumstances that amounts to a change that brings it within the charge to income tax.

As Vaughan, I vote all CGT.

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By Accountant A
15th Oct 2019 18:35

BIM60555 says "The legislation should always be understood in the context that it is taxing only what are, in substance, trading profits". I think that only obtaining planning permission would, as others have said, not fall within the TIL rules.

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joe
By Smokoe Joe
16th Oct 2019 15:40

I agree the intention was an investment property but the contention I have been given is that the obtaining of planning permission is prima facie evidence of a change of intention so a gain crystalises at that point and any uplift comes under IT.
Where the future intention were to change to dwelling s and then continue letting then I agree the intention is still investment, but if the reason for the planning permission is to uplift the vale for sale I can see ho HMRC might attack that as a change of intention from investment to trading.
I think it is quite grey between enhancing the value of an investment asset and changing it into a trading asset.
I am coming down with the view that if I tell the client the whole gain would be under CGT then it must be with a strong caveat that HMRC could have a counter view.

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Replying to Smokoe Joe:
joe
By Smokoe Joe
16th Oct 2019 16:55

The other consideration was that if the value uplifted because of plans to change to dwellings would that tip it to 18/28% for CGT rather than 10/20% as commercial if taxed under CGT?

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Replying to Smokoe Joe:
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By Bobbo
17th Oct 2019 14:03

Has there actually been a change of intention though?

The way your post reads is that Mr A wants to sell the building and has noted he can get more for it with PP for residential conversion. At no point has the intention changed from selling the property. So it's all capital not income.

That is not the same as Mr A decides to develop the building and gets PP to do so but then changes his mind and sells it.

I have zero experience of this sort of matter, so this is merely my opinion of what would make sense.

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Replying to Smokoe Joe:
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By whitevanman
17th Oct 2019 18:07

What you seem to be alluding to is the concept of a "supervening trade".
If you look at HMRC manuals (try BIM 20315 as a start) you will find some guidance and in particular, comment to the effect that there is a deal of difference between trading and simply taking steps to enhance the capital value of an asset prior to sale (which I and others obviously consider to be the case for your client). I think also, reading the case of Taylor v Good (also referred to in HMRC guidance) will give you a little more understanding / confidence in this area. The facts were far more suggestive of trading and PP was for quite extensive development and yet it was held to be capital.

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