Capital gains: computational rules: dual use assets
Gains on disposal of assets that have been used wholly and exclusively for the purposes of the property rental business throughout their period of ownership are not chargeable gains (section 535 CTA 2010). There are extensions to this rule to deal with assets that have been used other than wholly and exclusively for property rental purposes.
De minimis exemption
Where an asset has been used partly for the purposes of the property rental business and partly for residual purposes, there is a de minimis rule that allows the period of use for the residual business of the company to be disregarded (section 535(3) CTA 2010). The reference to partial use includes references to both physical use (for example half the building is used for the residual business) and time (all the building is used for the residual business for less than 12 months). The rule is that if the periods of residual business use amount to less than a year, in t o t a l, then any gain on disposal will not be chargeable to tax. To decide if the condition is met, all periods of residual business use are aggregated. For this purpose, periods before the company joined the regime are ignored.
For example, company C buys property P in July 2005, and uses it for administrative purposes for six months before renting it out to an unconnected tenant, T1. C joins the regime on 1 January 2007. T1 vacates P in October 2009 and C uses P for administration for six months until a new tenant, T2, moves in May 2010. T2 vacates P in May 2012, and again, C uses P for administration until a third tenant, T3, moves in September 2012. C sells P in December 2012.
Here the entire gain on disposal will not be a chargeable gain since the aggregate of periods of residual business use is nine months. The six-month period of use for administrative purposes before joining the REIT regime is ignored.
Other use amounting to 12 months or more
Where an asset has been used partly for the purposes of the property rental business and partly for residual purposes, and the 12 month de minimis exemption does not apply, part of the gain on disposal is not chargeable to tax (section 535(5) CTA 2010).
To determine the portion that is not a chargeable gain, account should be taken of
- the extent to which the asset is used for purposes other than property rental business, and
- the length of time during which the asset is used for those purposes.
If the periods of residual business use are in aggregate greater than or equal to 12 months, the whole period of residual business use is taken into account in apportioning the gain.
Section 535(5) CTA 2010 talks about ‘reasonable’ attribution, having regard to actual use. In arriving at the extent to which property is used for residual purposes then apportionment by area will usually be the most straightforward approach although there may be a more appropriate indicator where there is no exclusive use of any particular area. The relative values of parts of a property can be affected by many factors and are unlikely to reflect the extent of use for one purpose or another. The appropriate indicator for assets other than land that are used, in part, for the property rental business will depend on the nature of the asset and the business arrangements.
For an example of attribution see GREIT05013.