Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on mitigating the tax on disposal of an industrial estate.
‘My clients, a husband and wife, have owned the freehold of a small industrial estate for a number of years in their joint names. The estate consists of several units let to small businesses.
Because of their age and failing health, the couple want to dispose of the investment as a going concern with or without outline planning permission for private dwellings. Without planning permission, the property is valued at about £1.5m and with planning permission it would be worth about £2.5m.
Incidentally, in case it is relevant, the clients have two grown-up children.
Obviously, the capital gains liability is going to be substantial and will be aggravated by the fact that a claim for capital gains tax entrepreneur’s allowance will not be possible because the estate will be classed as an investment rather than a business.
I would be obliged if readers could recommend ways of mitigating the liability, if this is possible.’ Query 19,357– Hopeful.
Reply by Terry: there is scope for inheritance tax planning and CGT holdover claims
‘Hopeful’s clients own a small industrial estate. Hopeful has established that the clients would not benefit from entrepreneurs’ relief for capital gains tax purposes on a disposal during the clients’ lifetimes as the asset is investment in nature. Nor would inheritance tax business property relief be available for the same reason. Relief was denied in Trustees of David Zetland Settlement v HMRC [2013] UKFTT 284 even though significant services were provided.
Two values are quoted, with and without outline planning permission, and it sounds as if there is already some ‘hope’ value to be considered.
Nowadays, almost all lifetime transfers to trust are chargeable immediately rather than potentially exempt, but the inheritance tax charge affords capital gains tax holdover relief to be claimed under TCGA 1992, s 260. Note that this is as long as the settlors and spouses (and minor unmarried children) are excluded from benefit.
Accordingly, the clients could transfer part of the estate to trust for the benefit of their adult children calculated so that the loss to their respective estates remained within their inheritance tax nil rate bands and hold over the gains arising.
They might then make outright gifts of the remainder of the estate to the children as potentially exempt transfers. If they had enough cash, they could shelter the gains arising on those gifts by investing in enterprise investment scheme (EIS) shares. They would receive a measure of tax relief and, in the event of death, the gains would be extinguished. After two years ownership the EIS shares (or any replacement EIS shares) would benefit from 100% business property relief for inheritance tax purposes.
As suggested in an answer to another recent query, there might be a further possible planning opportunity. For the gain to be held over it is not necessary for the property to be given away for no consideration at all. The clients could sell the estate to a trust for any amount up to the original capital gains tax allowable cost without affecting the right to hold over the gain. It would only be if the actual selling price were to exceed the cost that capital gains tax would start to become due. By selling for the cost figures the clients could reduce the value of their immediately chargeable transfers and therefore any inheritance tax liability.
Stamp duty land tax (SDLT) would be payable by reference to the price paid rather than to the market value. The purchase price could be left outstanding. There would be no adverse tax consequences to this (but no tax advantage either). The clients might later decide to make outright gifts of the debts due as potentially exempt transfers.
If one of the clients became terminally ill, the other could transfer their share on the normal no gain/no loss basis between spouses and the value would be uplifted on death to market value. The survivor could then make gifts to the children without capital gains tax inhibitions. I gather that this is regarded as acceptable planning under GAAR as long as the recipient understands what is being done.’
The article is also available on the Taxation website.
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