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bigduckontax
bigduckontax, Accountant
Category: Tax
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Slightly complicated this (). My father bought the head

Customer Question

Slightly complicated this (for me). My father bought the head lease for a property in February 1980 that consisted of a ground floor shop and first and second floor living accommodation. They lived there and ran the shop until May 1984 when they moved to their own house but continued to run the shop until June 1987. The upper floors were empty. After June 1987 the property has been rented (all three floors) to a succession of tenants. In May last year my father sold the leasehold as a single entity. My mother’s name was added to the lease in May 1994.
I believe that there is no CGT to pay while they were living there and that one or both of them may qualify for letting allowance but I’m not sure. Also I believe the shop should be treated separately for CGT purposes even though it was not sold as a business owned by my father (his business ceased in 1987). How should the CGT be split between the shop and residential accommodation - one third to two thirds?
I’m a bit stuck with this so any help gratefully received.
John
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able yo help you with your question. You pretty well have it to a T, John. For the time they lived there Private Residence (PRR) applies to the flat which is at 100% of any tax. For the shop CGT applies for the entire period irrespective of whether your father was still in business. You have to split the shop from the living accommodation. It is possible that for the shop Entrepreneur's Relief may apply which limits the CGT to a 10% flat rate instead of the normal 18% or 28% or a combination of the two rates depending on the income including the gain in the tax year of sale. CGT will apply to the flat in proportion to the total ownership time in months (A) and the unoccupied ditto (B). To B take off 18 as owners are deemed to be in occupation for the last 18 months of ownership even if this is not the case. As they occupied before letting out then an entitlement to Lettings Relief (LR) may well apply and, in any event, everyone is entitled to an Annual Exempt Allowance (AEA) of 11.1K to offset any gain. You don't get both AEA and LR, just one or the other. I do hope that I have cleared the air for you in this matter.
Customer: replied 2 years ago.
Hello Keith. Thanks for the answer and I have a couple of clarifications please.
1. The lease was sold for the whole building so how do I divide the capital gains between the shop and the rest? Can I do it by floors I.e. A ration of 1:2 for shop to living accommodation?
2. Are both my parents entitled to LR individually or is it applied just once for the property?
3. Can you please confirm my understanding of your email that I can not claim both LR and thei AEA? I have seen other examples on money websites where both are taken into account.
Thanks for your help.
John
Expert:  bigduckontax replied 2 years ago.

Well, you could do it this way, but I suspect that HMRC might challenge the valuation. Were the whole building all residential that approach might work, but with an element of commercial premises that routine won't wash.

If both parents receive the rent which would be the case in a Joint tenancy [the legal term for joint ownership] then they would both be entitled to LR. LR is, of course, not always the maximum of 40K, but depends upon the actual rental received.

You are correct; you can have AEA and Lettings Relief. What you cannot have is AEA and Entrepreneurs' Relief; you cannot have both. This could cause a significant difference between you father and his spouse in their CGT affairs as she was not the business person in the matter. My mix up, sorry.

Customer: replied 2 years ago.
Again thank you. Just three final questions please.
1. I do not think my father is eligible for entrepreneurs relief as he has now sold more than 3 years after closing his business (in 1987). Is this correct?
2. Is my mother still eligible for LR even though they had moved out before she was added to the lease? She did receive her portion of the rent as you mentioned.
3. I intend to split the CG accrued by each parent according to the proportion of time they have been named on the lease. I.e. Just my father until 1994 and then split equally from then on. I hope this would be acceptable to HMRC?
Again thank you.
John
Expert:  bigduckontax replied 2 years ago.
Here is the exact advice from the Gov UK web site:
'You must make a claim to HMRC in writing by the first anniversary of the 31 January following the end of the tax year in which the qualifying disposal takes place, that is one year and 10 months from the end of the tax year in which the qualifying business disposal is made. For a qualifying business disposal in the tax year 2014 to 2015 (ending on 5 April 2015) a claim for Entrepreneurs’ Relief must therefore be made by 31 January 2017.'
Your father would appear to be out of time for ER.
I am sorry, I misread 84 for 94, so she has no entitlement to LR.
HMRC will probably accept this. My gut feeling is that you may in the end have to engage a trusted, local professional to negotiate with HMRC on this matter.
bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Thank you for your excellent support.