General: connected person and control sales: election to have sale treated as being for alternative amount
CAA01/S569 & S570
Sometimes the parties to a sale can make an election to have the sale treated as taking place for an alternative amount. They can do so if:
- the control test is met or there is a transfer treated as a sale by CAA01/S573 CA11540; and
- the tax advantage test is not met - CA13100.
These are the alternative amounts:
IBA - the residue of qualifying expenditure immediately before the sale.
MEA - the unrelieved qualifying expenditure immediately before the sale.
RDA - if an RDA has been given, nil; in any other case, the qualifying expenditure.
ATA - the residue of qualifying expenditure immediately before the sale.
An election may not be made in an ABA case.
In the example at CA13100 Rita and Chris make an election to have the sale treated as being for an alternative amount. For an industrial building the alternative amount is the residue of qualifying expenditure before sale. Rita and Chris’s allowances are calculated as if Rita had sold the building to Chris for £90,000. Rita has no balancing allowances or balancing charge. Chris’s allowances are based on a residue of qualifying expenditure after sale of £90,000.
If there is no alternative amount given the election has no effect because there is nothing to substitute for market value.
The election must be made by notice to HMRC not later than two years after the sale. It must be made by all the parties to the sale.
Once an election has been made all assessments and adjustments of assessments needed to give it effect should be made.
Where the control test CA13100 is met, the person(s) who have control when the election is made should sign the election. An election signed by a person who had control at the time of sale but who no longer has control when the election is made is not valid. For example, an election signed by a former director after ceasing to be a director is not valid, even if that person was a director at the time of the sale.
An election may not be made if:
- allowances or charges cannot be made on one of the parties to the sale;
- the buyer is a dual resident investing company (see CTM34560); or
- the asset is a qualifying dwelling house and either the buyer or the seller (or both) is not or has not been an approved body CA85350.
The first condition means that an election cannot be made where balancing charges cannot be made on the buyer, for example, where the buyer is a connected exempt pension fund or the buyer is a non resident who is outside the UK tax net.
Once an election has been made any balancing charges that would have been made on the seller if there had been no change of ownership are made on the buyer.
Eric controls The Dominoes Ltd. Eric owns an industrial building that cost £1million. When the residue of qualifying expenditure is £600,000 and the market value is £900,000 he transfers it to The Dominoes Ltd. The transfer is treated as taking place at market value, £900,000 and so there is a balancing charge of £300,000 (= transfer value, £900,000 less residue, £600,000). Eric does not want to be taxed on the balancing charge so he and The Dominoes Ltd. make an election under CAA01/S569. The transfer is then treated as taking place at £600,000, the residue of qualifying expenditure. A year later when the residue of qualifying expenditure is £560,000 The Dominoes Ltd. sells the building for £950,000. The Dominoes Ltd.’s balancing charge is £390,000, not £40,000 because that would have been Eric’s balancing charge if there had been no change of ownership.
In the IBA and the ATA case, if the building has not been an industrial building CA35100 or a qualifying dwelling house CA87000 throughout, there is no balancing adjustment where the election treats the sale price as equal to the residue of qualifying expenditure immediately before sale.