When is a property a business asset? By Rebecca Benneyworth
Property held by an individual can be a business asset for the purposes of Capital Gains Tax Business Asset Taper relief, but there have been several changes in the rules on this since 1998 when taper relief was introduced.
First, residential property, such as buy to let homes and flats can never be a business asset for taper relief, as the requirement is that the asset is used by a business, and letting is not regarded as a business for these purposes. It is just possible that residential property might qualify as representative accommodation in a farm or similar business, but buy to lets are out – they qualify only for non business taper.
For commercial property the position can be very complex if there have been changes in tenant over the period since 1998.
The first version of the rules was introduced in 1998 when the taper relief rules were drawn up. These provided relief for an asset owned by an individual and used in a trade of which he was the proprietor, or of a partnership in which he was a partner, or of a qualifying trading company with respect to the owner.
The first version of the rules therefore required that the owner of the property had a shareholding in the company which was using the property for its trade, as at the time a qualifying trading company was one in which the shareholder was a full time director or employee and owned at least 5% of the shares, or was not employed but owned at least 25% of the shares. It is important to remember that from 1998 to 2000 qualifying companies were determined in relation to a shareholder, and were not “stand alone” qualifying companies, so it is always necessary to consider whether the property owner held shares in the tenant company.
Rent is not mentioned, only use in the trade, so whether market rent is paid or not is not pertinent to acquiring business asset status.
In 2000, the definition of a qualifying company changed. Any unquoted holding in a company whose purposes were trading and did not include to any substantial extent purposes which were not trading became a business asset, and as a knock on result form this, all properties let to unquoted trading companies in which the property owner held no shares became business assets.
Many expressed surprise at this and viewed the outcome as an anomaly – it effectively provided business asset status on a wide range of let commercial property – but determined according to the legal constitution of the business occupying it. It is also possible that company tenants would have to prove to their landlords that they met the “purpose” test in order for him to be able to claim Business Asset Taper Relief.
Properties which changed status in 2000 will not qualify for full business asset taper relief in the hands of an owner who has held the asset since 1998 due to the “qualifying period” rule, which considers the taper relief status of the asset for 10 years before disposal or since 1998 if shorter.
The anomaly continued to provoke comment, and the Inland Revenue (as it then was) provided a most unexpected solution in 2004.
The solution to the anomaly as it had become known was to widen it still further. Instead of removing business asset status from let commercial property where the tenant was a company, it was extended to all let commercial property where the tenant is a qualifying trading company (an new definition of this was introduced in 2002), a partnership carrying on a trade or a sole trader. There was no longer any need for the owner to have any involvement in the business carried on by the partnership or sole trade.
Once again, the change in status will only be fully felt by those owning property from before the date of change at a point ten years after the change – that is in 2014.
Bob has a business unit which is divided into four equal parts and let to businesses throughout the period since 1996 when it was built. He is considering selling the unit now and comes for advice on the business asset status of his premises.
Business asset periods:
1998 – 2000
Only if Bob’s business was a tenant. This is not the case, so the premises are wholly non business for two years.
2000 – 2004
Those units let to unquoted trading companies during this period will qualify for business asset taper relief. It will be necessary to have the dates of tenancy and the type of tenant to hand to calculate business asset taper relief for this period.
All tenants are likely to qualify, so from 6 April; 2004 the premises are wholly a business asset. Unless of course any of them were empty! The requirement is that the asset is used for the purposes of the trade by a qualifying business. In void periods, the premises are not used for the purposes of any trade so these periods will also acquire non business status.
As you can see, this is a complicated area when it comes down to doing the numbers. The concepts themselves are not complex, but it behoves all acting for investors to have a clear record of tenancy and tenant in order to work out the CGT on disposal!