Tax Doctor:
Mark McLaughlin
ATII ATT TEP

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February 2004

Q:

I am considering selling a rental property. I acquired the property for £70,000 in April 2000, and it is currently worth approximately £150,000.

Please can you tell me if this qualifies as a business asset under the taper relief definition (I have two other properties currently rented and will be acquiring more, so I view this as a business from a layman's perspective)? The beneficial treatment versus non-business asset is obviously desirable.

A:

Capital gains tax taper relief is indeed potentially valuable. It applies to individuals but not companies. Taper relief broadly reduces chargeable gains by a percentage, according to the length of time that an asset has been owned after 5 April 1998 and whether it is a business or non-business asset. Business asset taper relief reduces chargeable gains by up to 75% after only 2 years' ownership, giving an effective rate of capital gains tax of only 10% for a higher rate taxpayer (or 5% for a taxpayer liable to tax at the basic rate). By contrast, a non-business asset reduces chargeable gains by a maximum of 40% after 10 years' ownership, at an effective rate of 24% for a higher rate taxpayer (or 12% for a taxpayer liable to tax at the basic rate).

Income from UK land and buildings is generally treated as arising from a 'business' and profits are computed on the same basis as the profits of a trade. However, it is still investment income and is normally taxed as such, unless the business activities amount to a trade, such as a hotel business.

For capital gains tax purposes, the letting of properties can be regarded as a business in certain circumstances. However, 'business' has a wider meaning than 'trade'. For taper relief purposes, your activities must amount to a trade for the properties to qualify as business assets. For example, if the properties are furnished holiday lettings, the disposal of a property could qualify for business asset taper relief (nb a property is a 'holiday letting' broadly if it is available to let commercially as holiday accommodation for at least 140 days in a 12 month period, is let for at least 70 days, and is not normally let to the same person for more than 31 consecutive days during a seven month period). By contrast, if the properties are residential (e.g. 'buy to let') they will be regarded as investments, in which case non-business asset taper relief applies.

Your query does not specifically state whether the properties are residential or commercial. In the case of a commercial building (and potentially a residential property, if a trade is carried on there) business asset taper relief can apply. If a property is used as the trading premises of a 'qualifying company' (i.e. broadly an unquoted trading company), it may qualify as a business asset when you dispose of it. In addition, from 6 April 2004 business asset taper relief is extended to property used in a trade carried on by an individual, or by a partnership whose members include an individual. Unfortunately, the extension of taper relief to property and other assets used in the trade of unincorporated businesses does not apply to periods of ownership before 6 April 2004. Non-business asset taper relief will apply to such earlier periods.

The potential sale of your rental property is presumably a 'one-off'. However, should you subsequently change the nature of your activities to property dealing (i.e. a trade of buying and selling properties for profit) as opposed to property rental (i.e. acquiring properties as an investment), the profit from selling properties would be liable to income tax as opposed to capital gains tax, and taper relief will not be in point. Operating through a limited company would mean that trading profits are liable to corporation tax instead. However, shares in an unquoted trading company generally qualify as a business asset for taper relief purposes.

Mark McLaughlin

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