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Landlord's delight
Generally, you can't enjoy the higher 'business asset' rate of CGT taper relief on something you own as an investment. This makes a big difference - on a business asset, the effective rate of CGT is only 10% of the gain after two years, when you would still be paying 40% on an investment.
Rental property normally counts as an investment. But it has counted as a business asset since 6 April 2000, if the building is let to a company which is not quoted on the Stock Exchange and which is treated as a 'trading company' under the CGT rules. That can be complicated for a landlord to check, but it may be fairly obvious.
This generous treatment will be extended to landlords of unincorporated trading businesses - whether run by sole traders, partnerships, or trustees - but only with effect from 6 April 2004. That makes life much easier for a landlord with a number of tenants - it becomes less important exactly what sort of tenant they are, as long as they aren't a quoted company (which is easy to find out) and they are carrying on a trade (which may be obvious, for example if you own industrial premises).
As with all things CGT, there is a catch. The new rule only applies to the period after 6 April 2004. You might expect to enjoy the full 75% taper relief by 6 April 2006, when you will have owned the property for two years after the change. But if you have owned the property since 1998, you will have had six years of non-business ownership before the two years of business. That means that only 2/8 of the gain gets the business rate, and the other 6/8 gets the lower relief. The calculations are very complicated.
There are things that can be done to avoid this effect, although they may be complicated and the Revenue may not like them. At the very least, if you are the landlord of commercial premises, it is worth looking at what these changes will mean. We can advise you.
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The plan which will maximise taper relief on commercially let buildings is as follows.
A building owned for some years which is let to trading businesses which are not incorporated will qualify for non-business taper in relation to the period up to 5 April 2004, and business asset taper thereafter. If the building has been owned since before 1998, on 6 April 2004 there will be six years of non-business ownership, plus the "bonus year", giving 25% relief. A year later, there will be a year of business ownership, but the relief will be 6/7 x 30% plus 1/7 x 75%. It will take a long time for the effect of the 6 years of non-business ownership to reduce.
A gift to a discretionary trust will make it possible to "reset the clock". The trust will then own the asset as a business asset from 6 April 2004 (the best date actually to implement the plan). If the building has been owned since before 1998, then as long as the trust owns the asset for at least one year, better taper relief (at 50%) will ensue. The numbers have to be checked if the building was acquired since 1998, because the non-business period will be shorter.
The problem with a gift to a discretionary trust is that IHT could be payable. The values should be checked. It may even be worth paying a small amount of IHT for a significant saving in
CGT, but this should be reviewed carefully.
The settlor is likely to retain an interest in the settlement (because the settlor will want the proceeds of sale). This means that the settlor will be assessed on the gains that the trustees eventually make, but the settlor will be entitled to the trustees' taper relief (at the higher rate) rather than the taper relief that the settlor would have been entitled to without the plan.
This is, as mentioned above, a relatively complex plan which relies on due care and consideration of all the facts. This note is intended only as an outline of how it is supposed to work, and should not be relied on without taking independent advice.
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