The freeholders are to grant a new long lease over another flat in the building. My client understands that this will be a capital gains disposal event, but has queried whether a measure of principal private residence relief would be due to him, given that the disposal is out of the freehold interest he owns that includes his main residence.
Can you please confirm how to approach my client’s capital gains position, whether any main residence relief would be due to him in these circumstances and how this would be calculated?
Your client’s share of the premium will be taxable as a “capital sum derived from an asset” under s22 TCGA 1992 – the asset being your client’s interest in the freehold. S42 TCGA 1992 allows a proportion of the brought-forward base cost to be set against the premium received. This is achieved by multiplying the capital gains base cost by the result of the formula “A/A+B” where “A” is the disposal value received, and “B” is the residual value of the asset after the disposal. As an example:
| Premium received for grant of lease on flat | £150,000 (A) |
| Value of freehold after the disposal | £25,000 (B) |
| Base cost of freehold before disposal | £30,000 |
Cost allowable against premium: 30,000 x (A) 150,000 / (A) 150,000 + (B) 25,000 = £25,714.
(Balance of cost to carry-forward for the freehold (£30,000 – £25,714) = £4,286)
I can see how your client may believe principal private residence relief could apply; he has by definition made a disposal out of his freehold interest in the building, and he lives in part of the building. However, your client occupies his own flat as his home and, based on the information provided, there is no disposal in respect of his home. The relevant part of the legislation in s222 TCGA 1992 is as follows (with emphasis added by me):
222(1) This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in–
(a)a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence, or
(b)land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area
The key points are that there must be:
- A disposal “of” a dwelling house/an interest in a dwelling house, and
- That dwelling must be the current owner’s main or only residence.
Your client’s interest in his home is undisturbed. The new lease being granted to the tenant is not a disposal “of”, or an “interest in” your client’s dwelling house, deriving instead from the underlying freehold interest. Your client is not, therefore, disposing of an interest in the dwelling house that he occupies as his main or only residence. The position may be different if your client occupied different parts of the property as his home either before or after it was converted into flats.
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