Minimising Capital Gains Tax – Readers Question

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Minimising Capital Gains TaxMy wife and I own a semi-commercial property where the ground floor commercial unit is occupied by a mini cab firm and the 2 x upper floors provide for a separate self contained residential unit. I have a commercial loan on the property as a whole, which recently, after five years of being on an interest only mortgage basis, has changed to capital and interest repayments with a 20 year remaining term, with no early repayment penalties. 

The ground floor commercial occupier has recently made an interesting informal offer to purchase the whole property from us, but accepting the offer would mean quite a hefty capital gains tax liability even after applying our annual exemption amounts. There have been no capital improvements that we have made to the property to help reduce this amount either.

I would like to ask your readers if they have any suggestions to minimising the CGT liability.

Some of the thoughts I have had include clearing the outstanding loan amount with our own savings, and splitting the freehold title to create 2 x long leasehold interests. Would selling off each long leasehold interest individually make any difference to our CGT liability? I could perhaps also take advantage of selling each interest in different tax years and take advantage of our CGT exemption amounts over 2 tax years? I’m also aware that we could “show” that we have lived in the residential part and attempt to minimise any CGT liability that way, but I don’t think that is a path I want to take.

Any advice warmly appreciated.

Thank you.

Mr M Gujral

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Comments

  • Dear Mr Gurjal

    The first point I would make is that you should treat any specialist tax advice on a forum as you would getting advice from a man in a pub. It may be right, it may be wrong but you will have no recourse.

    I use a boutique firm of Chartered/Certified accountants which specialise in property tax and where the owners are portfolio landlords themselves. Their advice is also insured but their fees are a fraction of those charged by the big six accountancy firms. If you would like an introduction please see the contact form in this thread >>> http://www.property118.com/landlord-tax/

    Now having explained that I am not a qualified tax adviser and that my understandings can not be relied upon as advice I will explain my understanding.

    I particularly like your idea of splitting the title and creating two long leaseholds and then selling each part in separate tax years. Obviously it makes sense to run this idea past your commercial mortgage provider in the first instance because if they refuse permission to allow this your plans will be stopped dead in their tracks.

    If your lender is agreeable in principle then you will need some advice on how to go about creating two long leasehold. A lady called Annette Stone who is a member here manages a freehold interest for my family and is very knowledgeable. She may well be able to help you with this. The following is a link to Annette’s Member Profile >>> http://www.property118.com/member/?id=384

    Another advantage I can see with this, aside from speading the gains over two years and using two annual CGT exemptions is that you will have an opportunity to retain the freehold revisionary interest or sell that separately too. You may end up with more money.

    Apart from checking with your lender, you will of course, have to check with your tenant/buyer whether this structured sale would be acceptable to them too.

    I hope this helps and please feel free to fire more questions back at me.

    Please remember though, this is not professional tax advice, just the opinion of a well meaning friend, a retired financial adviser who is no longer insured to provide financial or tax related advice

    Will you be supporting our mission to facilitate the sharing of best practice amongst landlords and letting agents by becoming a member of The GOOD Landlords Campaign by the way?


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  • Dear Mark. Thank you for your response and the suggested further contacts you have provided which I will look into.
    On the issue of whether the lender is agreeable in principle on splitting the f/h title into 2 x separate l/h interests, I would consider using savings to redeem the outstanding loan in the first place rather than having to engage the lender in this process.
    In the current lending climate I am pretty convinced the lender would take the opportunity of imposing new far more onerous loan terms.
    Once redeemed and the title split, I don’t think I would be looking to take out further loans on the property as I would be looking to sell off the new 2 x l/h interests to the current ground floor commercial occupier.
    This approach, in this instance, would also possibly actually improve the purchasers stamp duty position as the likelihood is he would be paying SDLT at 1% on 2 x purchases rather than 3% on 1 purchase, given that the agreed sale price of the property as a whole remains the same.
    I suppose the question remains as to what, if any, further specific CGT benefits there are for splitting the f/h title, other than the ability to be able to sell newly created l/h interests across different tax years.


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  • If it were me doing this I would create a long lease for the flat with a low ground rent fairly low service charge liability and I would keep this and let it out, particularly if you do not need to sell it to redeem the mortgage. You could then create a separate long lease for the shop and sell this to the commercial tenant.

    The benefit would be that you would have an income from the shop with no liabilities, an income from the flat and you would still own the freehold which would continue to be a valuable asset bit as Mark says you need to take advice on structuring this as a lot will depend on what else you own and hiply your personal tax affairs are arranged which none of us are qualified to comment on


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  • Thank you Annette for your comments.
    I don’t think I would incur any CGT liability if I were to sell the commercial unit on a long term lease and just keep the residential unit above on a long term lease.
    The current commercial occupier however, would like to purchase the complete building. The sale of both of the newly created l/h interests would create a CGT liability.


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  • If you create two leases then these are two separate items for taxation and the freehold is a third. The value of the freehold will be based on the length of the leases and the ground rent payable. You will then have three separate assets which you are disposing of and as I said you need to take specialist tax advice on this.

    Do not take tax advice from anyone on a website. The advice must come from a tax specialist who is covered by professional indemnity insurance.


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