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HMRC internal manual

Capital Gains Manual

Borrowing to acquire freehold interest let on a commercial basis

The trustees may acquire a freehold interest at a time when there is outstanding trustee borrowing and then let that property on commercial terms. Alternatively they may acquire a long lease which is sublet or a chattel that they lease on commercial terms. The grant of a lease is a part-disposal of the freehold interest and a transfer of value for the purposes of TCGA92/Sch4B/para2(1)(b). The asset transferred is the freehold interest not the lease, CG39120. If the freehold interest was acquired with borrowed money the test in TCGA92/Sch4B/para2(4)(a) applies, CG39180, and the amount of value transferred is the market value of the freehold.

If there is outstanding trustee borrowing at the material time, ie when the transfer is effectively completed, TCGA92/Sch4B/para10 will apply if the transfer of value is linked with outstanding trustee borrowing. Tangible property and any interest in the property is an ordinary trust asset. For the expenditure to be in respect of ordinary trust assets the property must be settled property immediately after the material time,CG39150, or the alternative condition in TCGA92/Sch4B/para8, CG39160, must be met.

These two tests may be looked at together. The reversion to the freehold is still part of the settled property and the lease itself is represented by the right to the rental steam. Schedule 4B will not apply:

  • if trustees borrow money to acquire the freehold interest in a property which is then let commercially, and
  • at the material time there are no outstanding trustee borrowings other than those which have been applied for normal trust purposes.