All references below are to TCGA 1992 unless stated otherwise.
In a previous TQOTW (found here), we considered the availability of business asset rollover relief in respect of FHL by virtue of s.241 and s.241A.
The provisions of s.241 deal with all CGT provisions which apply to FHLs. In your client’s particular scenario, they need to watch out for the application of s. 241(6). This considers the situation whereby a claim for PPR is being made on a property that has been used as an FHL on acquisition and on which a rollover relief claim was made at the time. The effect of this provision is to restrict PPR under s. 222 from applying to the previously rolled over gain.
Looking at a practical example:
Peter bought an FHL in June 2010 for £400,000. At the time of acquisition, a gain of £150,000 was rolled over into this, giving a net base cost of £250,000.
The property was let as an FHL property from acquisition until June 2020. At that time, Peter moved into the property and occupied it as his only or main residence until the property was sold in June 2023 for £600,000.
The gain arising is £350,000. The gain eligible for PPR is around 23% as he occupied the property for three years out of the thirteen years of ownership. Applying PPR (£80,500) would leave a net gain of £269,500. However, the effect of s. 241(6) is that PPR is not available on the rolled over gain of £150,000 and only on the balance of the gain of £200,000.
Therefore, PPR would be 23% of £200,000 i.e. £46,000. Therefore, the chargeable gain after PPR is £304,000 (£150,000 + (£200,000 less £46,000).
HMRC cover this restriction and provide an example in their manual found at CG60287.
As this is a disposal of residential interest (Schedule 1B TCGA 1992), the gain would have to be reported within 60 days of completion in line with Schedule 2 FA 2019.
It is important to note that a time apportionment basis has been used to calculate PPR which is in line with HMRC’s current view (see CG64760). In Ritchie & Ritchie v HMRC [2017] UKFTT 0449, the judge deemed the time apportionment basis was not appropriate and instead a just and reasonable apportionment needed to be considered. This decision went against previous case law- Henke v HMRC [2006] SpC 550 and whilst the Ritchies’ case is non- binding by virtue of it being a FTT decision (the Upper Tribunal in Ritchies case did not deal with the technical issue) it does create some uncertainty on the apportionment for PPR.
Other considerations:
Depending on your client’s personal position, they may want to consider purchasing a new FHL, in which case the gain can be deferred. However, your client will need to be mindful of s.241(5) which affect the quantum of rollover relief under s.152 TCGA 1992 as the property was not used as a qualifying FHL throughout its ownership.
Alternatively, if the client has decided not to purchase a qualifying asset for rollover relief (s.155), we could see if Business Asset Disposal Relief (BADR) is available. BADR can only be considered if the property has been a qualifying FHL for at least two years up to the date of disposal, an issue we have considered from a practical perspective in a previous TQOTW (found u).
Please share this article with your clients
It’s not easy to make 100’s of Accountants happy, and that’s what we did last year ! Previously known as Accountants in Business (AIB), Croner-i are back this year with a new conference for accountants in Business and Practice. Rated 5 ★★★★★ by previous attendees, this essential annual update has been designed specifically to keep you up to date with the latest changes in Tax, Financial reporting, Company Law and much more. Register your interest!
