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A.  Introduction

1. Capital Gains Tax is essentially a lifetime tax payable on the increase in value of chargeable assets when they are realised.  Not necessarily sold (see below) under the Taxation of Chargeable Gains Act 1992 (“TCGA” of just “CGT 1992”).

2. The amount of the tax against what and the reliefs available are reviewed annually.  As the Chancellor of the Exchequer balances the need for taxable revenue against the desire to give a reason for businessmen to get up and earn.

3. Frequent confusions are:

(a) although most of us will come across CGT when disposing an asset, CGT can also arise when no real profit is in fact made on a disposal.  This can occur where:

(i) in certain circumstances assets are settled in to a trust [see Section 53 TCGA].  Although please see below on Roll-Over Relief;

(ii) where parties divorce but the settlement occurs after the divorce itself or the parties have lived apart for a long time before they settle;

(iii) following a mediation or a Court case where one party might well receive assets or a payment for those assets but would have preferred not to sell or dispose at all.

(b) the layout of TCGA is very similar to the death tax, now called Inheritance Tax under the Inheritance Tax Act of 1984 which replaced the old Estate Duty regime.   The effect is that some clients and occasionally their advisors can misapply the different rules and/or the cases which have been decided;

(c) CGT when payable, becomes payable on the exchange of the Contract which confirms the transfer of the asset.  Option Agreements are the familiar one.  The Option is a disposal in its own right but the consideration is usually at that stage the payment for the Option.  If exercised then the Option disposal then becomes the main disposal.  Often critical when, say, a field has only agricultural value at the time of the Option where the Option will not be exercised to payment unless and until Planning Permission for development is obtained with satisfactory conditions;

(d) under the Act there are reliefs.  This raises (i) what relief and if it is available and (ii) is it applied for in time.

4. As may be expected there are entire books on this subject which this paper is not seeking to compete with [for example, for the rural land owner, see Stanley “Taxation of Farms and Landowners”].  Nor is it intended to be a substitute for direct advice.

B. The Growth of the Family Investment Company

5. For a period of time a very clever tax advisor did advise some very wealthy people on some investment arrangements partly to avoid payment of income or corporation tax or CGT.  Ultimately this led to a number of cases the explanation of which was behind this work but are explained in the full judgments in RFC 2012 Plc (In Liquidation) (formerly The Rangers Football Club Plc) (Applicant) and Advocate General for Scotland [2012] UKSC 45 and Barker v. Baxendale Walker Solicitors [2017] EWCA Civ 2056.

None of this paper suggests anything like the circumstances in those or similar cases.

However, since the introduction of Section 260 Capital Gains Tax Act and Finance Act 2006 people are transferring assets in to family trusts of Family Investment Companies in the knowledge that they can claim in respect of CGT holdover relief rather than pay CGT (see below) and where investments and assets remain within the United Kingdom.

C. The Reliefs

(i) Principle Residence

6. For most of us the most important relief from tax is the tax payer’s principle private residence, the main section being Section 222 to 226 of the Act.

7.(i) But some men’s house can be literally a castle and so the house and generally up to 0.5 hectares is allowed and you can have one house [see Section 222 (3)]
(ii) But since 2013 where you own a house worth more than £2,000,000 personally or partly by a company there are special tax charges under the Finance Act 2013 [Schedule 25 CGT – Annual Tax Sections 94 and 174].

8. But the relief is not available if the tax payer has obtained in relation to that property under Section 260 of the Act “holdover” relief (for holdover relief see below).

9. When principle private residence relief is claimed it is an absolute relief.  There is no clawback so it is a valuable relief.

(ii) Holdover Relief

10. Always rather important to distinguish the use of the word “Holdover” (Section 165 and 260 of the TCGA) from “Rollover” (Sections 248 A – E 1992).

11. There are, nevertheless, two different forms of holdover relief under:
(a) Section 165 and
(b) Section 260.

Two holdovers for two different circumstances.

12. Neither can apply to transfers to non-residents where there is a trust in which the Settlors infant children can benefit, a potential trap for the trust drafters.

13. With both there is a potential clawback if the Donee emigrates within six years (details of which will appear in a separate post-Brexit paper later).

14. The first type of “holdover” (Section 260 TCGA) is for events which cross the line between a lifetime transfer and death.  Where the gift would not qualify for other relief and is not a Potentially Exempt Transfer, holdover from CGT is claimable, typically claimed on property which for one reason or another does not attract relief.  The risk usually in such cases is that if a chargeable transfer exceed the nil rate band (£325,000) a lifetime charge of 20% for IHT 20% and the Residents nil rate band (combined) will be immediately payable (for Death Duties and Death Tax see separate article).

15. However, under Section 165 is in contrast a little easier to explain and apply.  It can apply not only to a tax payer’s business assets but also to assets not used in a business but where Agricultural Property Relief would be available on a gift.  So the tax payer rather than paying CGT holds it over.  The Donee gets the asset at the tax payer’s original base rate.   CGT is deferred but on a subsequent disposal the Donee will face an artificially low base value.  To avoid that or a rise in CGT rates some Donor’s prefer to elect to pay the tax for their Donee.

(iii) Roll Over Relief

16. “Roll over relief” is itself quite different from holdover but like its cousin applies in two distinct circumstances under two separate Sections:

(a) Section 248 A – E TCGA where there is a division of joint interest and

(b) under Section 152 on a replacement of assets.

17. Many assets are held (particularly larger assets) jointly but there can occur times when those owners want to divide or separate.  This is possible without CGT payment (as the parties are simply dividing the assets they already owned) under Section 248 A – E TCGA.  Nor should stamp duty land tax (“SDLT”) be payable thanks to Schedule 4 Paragraph 6 of the Finance Act 2003.

18. The method, effect and application of this form of relief occurred in the combined Appeals in Jenkins v. Brown; Warrington (Inspector of Taxes) v. Sterland [1989] STC 577 decided before Knox J.   Members of a farming family put their individual assets in to a family trust.   The beneficial interests were expressed as a value of the land when put in to the trust.  When the family members decided to take out their land the issue was whether CGT would apply.  There was no disposal for CGT (explained in more detail in the case which is available to read free on the internet although the Revenue itself has a good summary of the facts on this and other cases in its website under CG73002 and CG73015).

(iv) Entrepreneur’s Relief

19. The most popular relief for most clients consulting Solicitors is entrepreneurs relief under Sections 169 I – 169 S TCGA 1992.  As most quickly spot, it is an addition to the original Act.

20. Any claim has to be made and in the right way by the first anniversary of 31 January following the end of the tax year in which the disposal was made.

21. To succeed there must be a material disposal of a business asset in one of three ways:

(i) a transfer of a whole or part of a business;

(ii) a disposal of assets used in the business when business ceases or

(iii) a transfer of the trading companies shares.

22. By an owner which means:

(i) the business must have been owned for one year before disposal;

(ii) equally the asset disposed of must have been used and owned for at least a year before cessation of the disposal being within three years of cessation [see Purves v. Harrison [2001] STC 267] and

(iii) if trading through a company:
(a) the tax payer must have been an officer of the company and for a year and
(b) the company itself must have been a trading company.

In short 80% of its activity must be trading.

23. Perhaps because rural assets are so expensive in relation to the revenue received for them, many of the cases making the Law Reports are in relation to agricultural property with many on if there has been a disposal of part or where there is a sale, the albeit reduced business, carries on.
In McGregor v. Adcock [1997] 1 WLR 864 the retiring farmer, Mr. Adcock, had a mixed farm on just 35 acres but in 1973 he gained planning for development on 4.8 acres which he sold later that year.  He later sought within time to claim what is now entrepreneur’s relief.  It was held that this was not a sale of part.  There was a fundamental distinction between the sale of part and an individual sale of a business asset.

In Atkinson v. Dancer & Mannion-Johnson (61 TC 598) High Court there was a combined Appeal as the legal issue was the same and whether there was a disposal of part.  Mr. Dancer farmed 89 acres 22 of which he owned, the rest was rented.  In the 1970’s he started to move his enterprise from mixed farming to egg production.  By March 1983 age started to slow him down but he was able to sign a conditional contract to sell 9 aces if planning consent for development was obtained in December 1983.  He sought relief.  Meanwhile Mr. Johnson had farmed 78 acres initially with his sister.  By 1983 in ill health he had to slow down and sold 17 acres in April 1984 and another 18 in December 1984.  He also sought relief.

It was held that whether there was a disposal of whole or part rather than a business sale was a decision of fact each time but neither in the view of the Court were disposals of part for which CGT relief would be obtained.  Rather they were disposals of an asset the business for which carried on.

In Pepper v. Daffurn [1993] STC 466, again a farmer this time with 113 acres where he farmed beef and sheep sold off 83 acres including the farm house in 86.  This disposal qualified as a sale of part and that was not the issue.  Although he carried on with what he had left.  He applied for development permission for part.  He was left with his yard which qualified as a sale of part and gained relief but not the other land.  The relief was limited to the disposal which directly related to the farm business and the earlier disposals.

24. In summary, therefore, a part disposal on the way to a full disposal can attract relief particularly when it is evidentially clear the tax payer wanted to sell up as in Purves v. Harrison [2001] STC 267.  However, when there is a sale of part and the business continues, albeit in a reduced way, the Revenue take a more restricted view applying the “associated disposal” test.  When this is likely a bit of pre-disposal planning is sensible in an effort to make sure the intended disposal is a “material disposal” of part of the business asset rather than an “associated disposal”.  Typical in planning is to check if the asset itself is part of the business at all, often by getting the assets on the balance sheet for a good year before disposal and then seeking clearance from the Revenue before sale.

25. Associated disposals can be by individuals but not trustees and the business itself could be a trading company or a business in which the tax payer participates for the relevant time but with an “associated disposal” the allowance of entrepreneur’s relief is more limited.  There is a real chance of no relief or restricted relief:

(i) if the tax payer has not been involved in the business throughout the period of ownership of the disposed asset;

(ii) if the disposed asset has not been used throughout the period of ownership and/or

(iii) if rent has been paid for the use of the asset.
As a result the retirement planner would usually be looking for arrangements which would secure “clearance” from the Revenue before the disposal is made and which the Revenue accept that there is a material disposal rather than an associated disposal.  If not, then to make changes before the asset is disposed of.

(v) The Annual Allowances and Losses

26. As mentioned above [2] the rates for CGT are reviewed annually before the Chancellor’s Budget.  Currently for 2018/19 they are as follows:
Higher Rate taxpayers – 20% to 28%
Entrepreneur’s Relief – 10%
Annual exemption relief – £11,700.

27. And where there is profit there may also be loss.  Although there may be a capital gains tax profit this may be set off against an income tax loss in allowable years.  The relevant section is Section 67 of the Income Tax Act 2007.  Two helpful cases explaining how this may operate are Scranbler v. H.M. R.C. [2017] STC 2018 and Naghshineh v. H.M.R.C. [2018] UK FT 1453.  The issue in the last case was a tax payer who had bought a farm without any farming experience at a bad time as following the purchase there was amongst other things bird flu which caused the farm to lose money.  The case concerns whether the “hypothetical competent farmer” would have made a loss and/or whether that hypothetical farmer would have made some provision to reduce his losses before they occurred.  But the point is having accepted the losses these could be set off against the total tax payable.

 (vi) Warning

28. CGT is not, however, an easy tax to get right for the client, the Lawyers or the Accountants.  This paper is an indication of the risks but not to be read alone and is no substitute for careful advice.  As two of many cases indicate, in Walker Executors v. IRC [2001] STC (SCD) 86 (where a deceased Executor treatment of a casting vote in deciding whether the deceased had control under IHTA Section 269 (3) or in Swain Mason v. Mills Reeve [2012] EWCA Civ 498 (consideration of a professional advisers duty when a client is about to lose valuable IHT relief).

If we can help please contact David Hassall (david.hassall@hassall.law) or Peter Norris (peter.norris@hassall.law)

6 Fore Street,
Devon, TQ7 1NY.

01548 854878

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