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TonyTax
TonyTax, Tax Consultant
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My wife and I have sold our property (joint owners) which was

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My wife and I have sold our property (joint owners) which was our family home after twenty years living there, we are 64 and 63 yrs and not currently working.
One third of the floor area of the property was separately rated for commercial use as a restaurant which we ran. We have therefore declared one third of the sale price and applied the 'allowable' costs ie: the costs of sale, property improvements and the cost of original purchase, to arrive at a total capital gain which we are splitting equally between us in our CGT declarations and on which we are claiming Entrepreneurs Relief. Are we acting correctly?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you confirm that a single agreed price was paid for the property as a whole and that there was no split between the value of the residential area and the business area please. Was the restaurant business itself sold or did that cease when you retired?
Customer: replied 2 years ago.

Yes the property was sold as a whole without splitting business/residential areas. The business ceased when we sold/retired there was no payment for goodwill etc.

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Customer: replied 2 years ago.

Ok

Expert:  TonyTax replied 2 years ago.
Hi again.

The tax office may ask questions about how you arrived at your figures especially if you have not provided them with a detailed calculation and explanation as to where the figures in the boxes on capital gains pages come from. HMRC use the District Valuer to look at some property transactions, particularly those similar to yours.

Much depends on the property and how each of the residential and business areas is accessed. If the residential area has an independent access then the tax office may argue that the sale price be split between the business and residential parts based on their respective values, if such values can be obtained. In that case, improvement costs would need to be applied to the part of the property being enhanced, the business premises or the residence.

If both parts of the property can only be accessed from the same entrance, then the method of calculation you have used thus far will have merit but you may still be asked for further information by the tax office.

In a case such as yours, I would tend to dislcose the total sales price and claim main residence relief and entrepreneurs' relief by using the appropriate box on the capital gains pages and setting out the figures in your calculations.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Access to the residential area was only possible through the restaurant. We paid domestic rates on the residential part.

I have detailed my computations in a separate note to be sent with each of our tax returns pointing out that the proceeds of the sale of the commercial property are one third of the total sale price and showing the allowable costs I have applied to reach our net capital gain in each case. My wife was operating as the restaurateur and she has a trading loss to put against her gain.

I have only applied one third of the original purchase price to my calculation, is that correct?, the property was purchased as a whole and the existing business had closed down at that time.

Expert:  TonyTax replied 2 years ago.
Since the residential area was only accessible through the restaurant, a division of the sale price based on floor space is not unreasonable.

If your wife was running the restaurant as a sole trader, then she should qualify for entrepreneurs' relief provided she meets the criteria set out in HS275 here. Unless the business was run as a partnership in which you were a partner or through a limited company in which you held shares you will not qualify for entrepreneurs' relief for your share of the business premises gain. See page 3 of HS275.
Customer: replied 2 years ago.

I see your point. I read their guidance on Entrepreneurs Relief and deduced that since I was a direct co-owner of the business premises which were sold I was eligible to claim relief on my part of the capital gain on the sale proceeds is that not the case?

Also as I mentioned I have only applied one third of the original purchase price to my calculation of gain, is that correct?, the property was purchased as a whole and the existing business had closed down at that time, (this could make a significant difference to my personal liability if I cannot claim relief!)

Expert:  TonyTax replied 2 years ago.
From what you have told me, you cannot claim entrepreneurs' relief as you were not a partner in a business or a shareholder in a limited company through which the business was run.

You said your wife has a trading loss as opposed to both of you having a trading loss. You only qualify for ER if you sell an asset you own which is used in a business, part of which business you own, either as sole trader, a partner in a partnership or as a 5% = equity shareholder in a limited company of which you are an officer or an employee.

On the basis that only one-third of the premises was used commerically, two thirds of the gain should be covered by main residence relief and one-third of the gain will be taxable subject to claims for entrepreneurs' relief in the case of your wife. The business asset has to be sold within three years of the cessation of the business for ER to apply.
Customer: replied 2 years ago.

Ok, thank you that seems clear, if rather bad news though.

As I mentioned already, I have only applied one third of the original purchase price in my calculation of gain, is that correct?, the property was also purchased as a whole with no distinction between areas, no payment was made for the business or goodwill as it had closed down at that time, (this could make a significant difference to my personal liability if I cannot claim relief!)

Expert:  TonyTax replied 2 years ago.

I said in previous posts that the split of the gain based on floor space is fine especially since the property is effectively one unit as access to the residence is through the restaurant. If the residence could be sold separately from the business premises, then you would probably need to have the residence and the business premises valued separately.

Whilst you will not qualify for entrepreneurs' relief on that part of your share of the gain allocated to the business premises, you will qualify for main residence relief for that part of the your share of the gain allocated to the residence. Your wife will qualify for ER and main residence relief.

Customer: replied 2 years ago.

Yes Thank you very much, I understand that part clearly now, but I think you may have mis-read my last query:

When working out the allowable costs to apply against the gain I only used one third of the original purchase price of the whole property (ie £30,000) (purchased as one property for £90,000, the business having been closed down some time previously) should I use the full purchase price to put against our gain?

Expert:  TonyTax replied 2 years ago.
If you are splitting the disposal proceeds as to one-third to the commercial part of the property and two-thirds to the residence, then you can only allocate one third of the original cost of the whole property to the part used commercially. The same principle would apply to improvements costs which benefit both parts of the property and the costs of buying and selling the property.

If any improvement was to a specific part of the part used commercially, I would allocate all that cost to the part used commerically. By the same token, the cost of a new bathroom in the residence should not be allocated to the cost of the part of the property used commercially as it has nothing to do with it.
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