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|Exchanges Of Joint Interests In Land: ESC D26|
Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEPMatthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, points out the applications and limitations of an Extra-Statutory Concession on Capital Gains Tax.
ContextA relief along the lines of TCGA 1992 ss 247 and 248 (relief on compulsory acquisition of land) may be claimed to alleviate CGT which would otherwise arise where interests in land which is in the joint beneficial ownership of two or more persons are exchanged after 19 December 1984 and:
• either a holding of land is held jointly, and, as a result of the exchange, each joint owner becomes sole owner of part of the land formerly owned jointly; or
• a number of separate holdings of land are owned jointly, and, as a result of the exchange, each joint owner becomes sole owner of one or more holding.
Warning: ESC D26 precluded where main residence relief appliesConcession D26 does not apply where the interest in land acquired is or becomes the owner’s principal private residence (which corresponds to the restriction on roll-over given by concession in TGCA 1992 s 248, although the 6-year time limit is not necessary to repeat). However:
(a) the concession is extended to cases where joint owners are owners of houses which are their respective principal private residences, provided:
(i) as a result of the exchange each becomes the sole owner of their respective residence; and provided
(ii) the gain otherwise arising on a disposal immediately after the exchange would be wholly exempt; and provided
(iii) each owner agrees that the base cost of his residence is the original cost of the joint interest and that his sole interest was acquired at the time the joint interest was acquired.
(b) Note that condition (a)(ii) is applied strictly. It is often the case in family farming partnerships that a farmhouse is occupied by different family members at different times. When a move to rationalise a holding takes place, it may well be that each house qualifies for only partial private residence exemption. HMRC have confirmed that the extension of ESC D26 cannot operate in such cases. Furthermore, it would not operate where part of the premises had been used exclusively for business purposes. Note, in addition, that if the house is then occupied without the business part being so occupied exclusively, the concession cannot operate.
(c) Nonetheless, HMRC do admit that it is possible for a property to comprise separate residences for the purposes of the extended concession. Therefore if a house is jointly owned by A and B and, prior to an exchange of interests, A and B divide the property into two residences each occupied by them respectively, it is then possible to apply the extended concession – though, of course, each owner would have to establish that the whole house was his residence prior to the division (so that any subsequent gain after the exchange was wholly exempt).
(TACS Talk Autumn Countryside Taxation Conference October 2005, paper by Adrian Baird, Chief Taxation Adviser to the CLA)
CommentThe concession given under ESC D26 can be very useful, but the detail of D26 does need to be observed carefully. Generally of course an exchange of land now brings about a double charge to SDLT, under the provisions of FA 2003 s47. What is interesting is that many of the so-called ‘exchanges’ covered in ESC D26 are in fact partitions for SDLT purposes, when only any equality money falls into charge (FA 2003 Sch 4 para 6).
More InformationThe above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.
About the AuthorMatthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.
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