Tax and windfall property

[CoffeeCup]

My parents own a commercial building since the height of the property boom in the late 80's.

I feel it has great potential to convert into flats (subject to planning permission).

They want to gift/give me the property now. I have said hold on until I check.

Purchased price in the 80's: 70,000 (Paid far too much!!!)
Value today as commercial: 100,000 estate agents estimate
Value with PP before conversion: 150,000 my estimate

Question: What is the most tax efficient method to pass the property to me?

I can buy the property at full market rate with a mortgage, if required. I'm concerned if I am gifted the property I will be liable for a significant CGT liability. Note: I own a house which I have lived in for 10 years. It has recently been rented out

I hope that all makes sense:rolleyes:

[Tax Accountant]

My parents own a commercial building since the height of the property boom in the late 80's.

I feel it has great potential to convert into flats (subject to planning permission).

They want to gift/give me the property now. I have said hold on until I check.

Purchased price in the 80's: 70,000 (Paid far too much!!!)
Value today as commercial: 100,000 estate agents estimate
Value with PP before conversion: 150,000 my estimate

Question: What is the most tax efficient method to pass the property to me?

I can buy the property at full market rate with a mortgage, if required.

I'm concerned if I am gifted the property I will be liable for a significant CGT liability.

Note: I own a house which I have lived in for 10 years. It has recently been rented out

I hope that all makes sense:rolleyes:

Whether he gifts the property to you or sell to you, he will still be taxed thereon at open market value as this is a transaction between related persons.

As it has been used as a commercial purpose, your dad may be eligible for ''business asset taper relief '' on at least some of the gains.

You would be deemed to have acquired it at the same open market value for your future calculation of CGT when you sell. Therefore, gifting would not make any difference to either of you.

Ramnik

[CoffeeCup]

Thanks for the reply.


Whether he gifts the property to you or sell to you, he will still be taxed thereon at open market value as this is a transaction between related persons.


Understood!.


As it has been used as a commercial purpose, your dad may be eligible for ''business asset taper relief '' on at least some of the gains.

Sounds like this is key to reducing the tax bill. The property has been rented to business(s) since 1989, vacant for the last 3years.

Would my parents still be able to qualify for ''business asset taper relief '' even tho they themselfs did not run a business from the premises?

Should my parents carry out the conversion to flats and then pass the property to me? I'm thinking any value I add to the property will leave me open to CGT when I sell. They on the other hand may have tax relief.

[Tax Accountant]

Thanks for the reply.



Understood!.


Sounds like this is key to reducing the tax bill. The property has been rented to business(s) since 1989, vacant for the last 3years.

Would my parents still be able to qualify for ''business asset taper relief '' even tho they themselfs did not run a business from the premises?

Should my parents carry out the conversion to flats and then pass the property to me? I'm thinking any value I add to the property will leave me open to CGT when I sell. They on the other hand may have tax relief.

You say that the property has been rented to business since 1989 but then go on to say that it has been vacant for the last 3 years.

Taper Relief replaced Indexation Allowance since April 1998. Therefore, Taper Relief is due by reference to the use of the property since April 1998 only. It is further complicated by the fact that the properties let to other businesses qualified for business asset taper relief only from a certain date much later on, I believe approx April 2004. You will certainly need to consult an experienced professional to work out the best route for you.

Ramnik

[Tweedle Dum]

If your parents gift you the property then it will come into the Inheritance Tax domain, not CGT. They will still have to pay CGT on the gains made whilst in their possession which shouldn't be anything if it's only risen 30k in 20 years.If they live for a further 5 years after gifting it to you then even the Inheritance Tax will be ruled out. Given the small rise in value in such a long space of time I would investigate wether it would be wise for your parents to convert the building themselves and then gift it to you. They may still be clear of CGT liability and so will you.

[CoffeeCup]

You say that the property has been rented to business since 1989 but then go on to say that it has been vacant for the last 3 years.


That is correct. Rented since 1989 to 2003 when the last tenant vacated the building. The property has become quite run down over the years and the letting has been punctuated by extended periods of vacancy.

I suppose it raises the question if taper relief only applies to the years it was rented out excluding the years when the building was vacant.



You will certainly need to consult an experienced professional to work out the best route for you.


I would agree. Does anyone have a recommendation? I presume such a consultation/calculation could be made via email/phone.

What would one expect to pay for such a calculation?

[CoffeeCup]

I would investigate wether it would be wise for your parents to convert the building themselves and then gift it to you. They may still be clear of CGT liability and so will you.

It would make sense for them to use up the maximum amout of CGT relief before passing the property to me.

Of course it raises the question. If a substantial amount of the gain is from conversion to residential, will they still be eligible for ''business asset taper relief ''. Possible not, I suppose this is where a professional would know how to massage the figures in my parents favour:rolleyes:

[Tax Accountant]

Business Asset Taper Relief normally aplies when a property has been used by the owners or the tenants for a ''qualifying trade''. Conversion or developement of a single property is not normally a trade unless this is your fulltime occupation and you are taxed as a self-employed on the profits.

Taper Relief is also calculated by reference to the use of the property over the final 10 years of ownership but not counting any period prior to April 1998. Where a proprty has been used both for a qualifying trade and also other purposes, there is a mixture of business asset relief and non-business asset taper relief, ie mixed asset use.

It would generally be difficult to obtain professional advice over the internet or telephone. Face to face meeting is generally desirable.

Ramnik

[CoffeeCup]

Edit: For anyone interested .... I have continued the discussion in a specialist tax site/forum.
http://www.taxationweb.co.uk/forum/discuss.php?id=11358


Business Asset Taper Relief normally aplies when a property has been used by the owners or the tenants for a ''qualifying trade''. Conversion or developement of a single property is not normally a trade unless this is your fulltime occupation and you are taxed as a self-employed on the profits.


Since 1998 to 2003 the property was rented to a 'qualifying company'. I have decided to aquire the property after it has received planning permission but before the conversion to flats. It's value at that point will be 150K. I've searched the IR website to see if the sudden increase in value due to planning permission would change the basic calculations and I cant find any reference. It looks like they are just concerned with a 'purchase price and date', a 'disposal price and date' and then the use of the property since 1998. Prior to 1998 I can use 'Indexation' to further reduce the liability.



Taper Relief is also calculated by reference to the use of the property over the final 10 years of ownership but not counting any period prior to April 1998. Where a proprty has been used both for a qualifying trade and also other purposes, there is a mixture of business asset relief and non-business asset taper relief, ie mixed asset use.

I've found an example in IR279 example 11. It talks about the period in which the property is vacant as 'non-business'. I will treat all years vacant as non-business for puposes of my calculation.

It doesnt look like the IR are interested in the use of the building prior to 1998. Simply the date purchased to unable them to look up the 'indexation factor'.

I feel I know enough to have a crack at the calculation. Feel free to identify where I may have gone wrong. The upshot is, it looks like *No* CGT will be liable.

Purchase price in July 1989: 70,000
Disposal price in July 2006: 150,000
Gain (before relief): 80,000

Business asset taper relief
2006 - 1998 = 8 years (5 years rented, 3 years vacant)

5/8 X 80,000 = 50,000
X 25% = 12,500 (Business gain after relief)

3/8 X 30,000 = 30,000
X 65%* = 19,500 (Non-business gain after relief)
-------
32,000 gain
less Indexation allowance: 28,560 (80,000 X 0.408)
-------
3,400
less Individuals CGT 8,800

No Tax to pay!

*includes bonus year as purchased before 1998

[Tax Accountant]

Since 1998 to 2003 the property was rented to a 'qualifying company'. I have decided to aquire the property after it has received planning permission but before the conversion to flats. It's value at that point will be 150K. I've searched the IR website to see if the sudden increase in value due to planning permission would change the basic calculations and I cant find any reference. It looks like they are just concerned with a 'purchase price and date', a 'disposal price and date' and then the use of the property since 1998. Prior to 1998 I can use 'Indexation' to further reduce the liability.


I've found an example in IR279 example 11. It talks about the period in which the property is vacant as 'non-business'. I will treat all years vacant as non-business for puposes of my calculation.

It doesnt look like the IR are interested in the use of the building prior to 1998. Simply the date purchased to unable them to look up the 'indexation factor'.

I feel I know enough to have a crack at the calculation. Feel free to identify where I may have gone wrong. The upshot is, it looks like *No* CGT will be liable.

Purchase price in July 1989: 70,000 + Indexation (40.8%) 28,560 = 98,560
Disposal price in July 2006: =150,000
--------
Gain = 51,440
--------
Taper relief:

2006 - 1998 = 8 years (5 years rented, 3 years vacant)

5/8 X 51,440 = 32,150
X 25% = 8,037 (Business gain after relief)

3/8 X 51,440 = 19,290
X 65%* = 12,538 (Non-business gain after relief)
-------
Chargeable Gain 20,575
Less Annual Personal Exemption 8,800 (17,600 if owned by both parents)
-------
Taxable Gain 11,775 ( 2,975 if owned by both parents)
-------

TO CHECK WHETHER BUSINESS ASSET TAPER RELIEF IS APPLICABLE FOR THE LETTINGS TO ANOTHER BUSINESS IN RESPECT OF ANY PERIOD PRIOR TO APRIL 2004 WHEN THE LEGISLATION CHANGED TO ALLOW BUSINESS ASSET TAPER RELIEF TO BUSINESS LETTINGS. I BELIEVE THIS WAS NOT BACK-DATED FOR BUSINESS LETTINGS PRIOR TO APRIL 2004.



You have done well to come this far. Well done.

The results will change as amended above if you deduct indexation first and taper relief afterwards. Taper Relief always comes at the end after all other reliefs and allowances have been deducted, including any loss reliefs.

The above may change further if the business asset taper relief is excluded in respect of any lettings prior to April 2004.

Your parents could gift half in one tax year and the other half in the following tax year to get the benefit of two years' annual personal exemptions. You should also investigate if it is wise for your parents to realise the developement gains themselves to benefit from taper relief which you wouldn't.

You should also look into the possibility of developement being taxed under income tax rules (ie a trade) rather than under Capital Gains Tax rules as you have assumed. This would be relevant whichever of you two carries out the developement.

Another contributor mentioned that gifts falls out of IHT after 5 years. It actually falls out after 7 years. There is certain amount of tapering if the donor dies in less than 7 years after the gift.

Ramnik

[CoffeeCup]

You have done well to come this far. Well done.

Your help is appreciated in getting me this far.


The results will change as amended above if you deduct indexation first and taper relief afterwards. Taper Relief always comes at the end after all other reliefs and allowances have been deducted, including any loss reliefs.

One of the guys over on Taxationweb.co.uk also alerted me to this error. I arrived at the same calc as you after the correction!


The above may change further if the business asset taper relief is excluded in respect of any lettings prior to April 2004.

I'll investigate this.



Your parents could gift half in one tax year and the other half in the following tax year to get the benefit of two years' annual personal exemptions. You should also investigate if it is wise for your parents to realise the developement gains themselves to benefit from taper relief which you wouldn't.

You should also look into the possibility of developement being taxed under income tax rules (ie a trade) rather than under Capital Gains Tax rules as you have assumed. This would be relevant whichever of you two carries out the developement.


This is an area I will look into. Neither my parents or myself have any previous history of development but I will need to find out the criteria they use, and at what point it changes from CGT to Income tax.

My mother is the sole owner of the property and for personal reasons would not include my father as joint owners. She would on the other hand include me if I was able use my allowance to further reduce the liability?

[Tax Accountant]

Your help is appreciated in getting me this far.



You are welcome.

Ramnik