Capital gains tax taper relief has been with us now for almost eight years, yet still there are illogicalities and points that are unclear in its operation. The joys of tax!In this article we focus on a common scenario. If you own the freehold of a shop which you use in your business you would expect any capital gain on eventual sale to be reduced by business taper (maximum of 75% after two years of ownership). If you own a residential flat which you let out you would expect non-business taper (maximum 40% after ten years of ownership). Simple!
But what if you own a single property comprising a ground floor shop used in your business and the flat above which you let out?
Assume you bought the freehold of such a property three years ago and that 2/3 of the property represents the shop and 1/3 the flat.
You plan to sell off the flat now and the shop in a couple of years’ time.
When you sell the flat you might think that, logically, because the flat has been an investment, non-business taper would apply to the whole gain. Wrong! The Revenue treat the whole building (ie shop + flat) as a single asset so that 1/3 of the gain gets non-business taper but the other 2/3 gets business taper. Better than you might have expected.
When the shop is sold you might expect the whole gain to qualify for business taper – wrong again. The gain attributable to the first three years when you owned the shop and the flat (ie 60% of the gain) has to be apportioned on the 1/3, 2/3 basis and only the gain attributable to the last two years (when you owned just the shop) qualifies fully for business taper. Overall this means that 80% of any gain ((60% x 2/3) + 40%) qualifies for business taper and the remaining 20% for non-business taper.
Confusing isn’t it? That’s why we’re here to help. We can help you to plan to maximise the potential taper relief available. Give us a call if you have any questions or concerns in this area.