In Robert Wright v HMRC [2017] TC06211 Mr Wright was found to have made a disposal when he was granted a lease in a leasehold property he already owned; creating a new lease resulted in a part disposal of the original lease.
Capital gains tax is chargeable on the disposal of assets. Disposal is not defined but is generally accepted as being when an asset is:
- sold
- given away, or
- exchanged for another asset.
with reference to a disposal including a part disposal. The creation of a long leasehold interest out of a freehold interest is a part-disposal for capital gains purposes.
Mr Wright and his son jointly acquired a 999 lease in respect of a property:
- They entered into an agreement with a third party to develop the property as flats.
- Their names were on the land register and they funded the work to the property.
- The third party undertook the development of the property but there was much confusion about whether they had a beneficial interest in the head lease. A deed of trust had been drawn up but never signed.
- On completion Mr Wright retained one of the four flats which was granted a new long leasehold interest out the head lease for 999 years less the time expired since the head lease was acquired.
- HMRC raised a discovery assessment on Mr Wright to capital gains tax in respect of the flat he retained on the basis that he had made a part disposal and had made no reference to it in the relevant tax return.
- Mr Wright argued that the granting of the lease was part of a return of capital and there was no gain because he had not disposal of anything; he still owned the flat therefore he could not have disposed of it and the gain should be taxed when he disposes of the flat.
The first tier tribunal, dismissing Mr Wrights appeal, found:
- The discovery assessment was validly made.
- The third party had no beneficial interest in the property, there was no signed deed of trust and their only financial interest was in the profits made on the development.
- The carving out of the new lease for the flat was a part disposal of the head lease. Mr Wright had misunderstood the principle in thinking that he could not have disposed of the flat because he still owned it; he and his son had jointly created a new asset with the new lease which had been transferred to Mr Wright in his own right.
- The correct value for the disposal was market value under the connected parties rules.
Comment:
A cautionary tale, do not assume that just because you started and ended a series of transactions owning an asset there has been no disposal for tax purposes, especially where leases are involved.
Links:
Robert Wright v HMRC [2017] TC06211
Joint property: legal v beneficial ownership
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