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In the third and final case study on capital gains tax rollover relief, MARK McLAUGHLIN ATII, ATT, TEP, consultant, and MICHAEL DAWSON MA, FCA, ATII, principal of Forbes Dawson, outline a planning opportunity involving furnished holiday lettings, non-residence and rollover relief.
In the third and final case study on capital gains tax rollover relief, MARK McLAUGHLIN ATII, ATT, TEP, consultant, and MICHAEL DAWSON MA, FCA, ATII, principal of Forbes Dawson, outline a planning opportunity involving furnished holiday lettings, non-residence and rollover relief. ARTHUR WAS HOMESICK. Having left the United Kingdom to acquire a used car sales business in Canada, he increasingly found himself pining for warm British beer, greasy cooked breakfasts and authentic chicken tikka curry. His solution to this dilemma was to buy a flat for furnished holiday letting in Brighton. This would at least provide an ideal excuse to return to the United Kingdom's sunny shores occasionally.
The plan
Before leaving the United Kingdom for Canada, Arthur had sold his interest in the local hostelry (The Winchester), following official allegations over the lack of meat content in pies and sausage rolls sold as bar snacks. Having somehow realised a large capital gain from The Winchester, and instinctively sensing an opportunity to save this unpaid tax liability (or at least postpone the dreaded day), he contacted his accountant to enquire about capital gains tax rollover relief. Arthur asked whether he could roll over his gain on the public house by reinvesting the sale proceeds in furnished holiday lettings. As explained in 'Arthur's Lucky Escape' (Taxation, 12 December 2002 at page 260), rollover relief remains available if a person has ceased to be resident or ordinarily resident in the United Kingdom when the new qualifying assets are acquired (see the Revenue's Capital Gains Manual at paragraph 60253). Furnished holiday lettings in the United Kingdom constitute a Schedule A business (except where they are operated as a trade assessable under Schedule D Case I). However, despite being taxable under Schedule A, furnished holiday accommodation is treated like a trade for various income tax and capital gains tax purposes. Commercial lettings, as defined in section 504, Taxes Act 1988, are therefore subject to claims for rollover relief (section 241, Taxation of Chargeable Gains Act 1992). Furthermore, the Revenue allows the property to be let for more than 31 days continuously during the off season (a period of up to five months) to the same individual, without prejudicing entitlement to rollover relief (see Revenue Interpretation 28 published in Tax Bulletin 4 in August 1992). Arthur was delighted by the news that his gain from The Winchester public house could be rolled over against the cost of the furnished holiday lettings. After all, as Arthur points out, 'a tax deferred is a tax saved'. But his good news does not end there. Individuals not United Kingdom resident or ordinarily resident are not normally liable to capital gains tax, subject to certain exceptions. One such exception applies to persons carrying on a trade (or profession or vocation) in the United Kingdom through a branch or agency. Those persons broadly remain chargeable on certain gains from the disposal of United Kingdom assets used for the purposes of the trade, or of the branch or agency (section 10(1), Taxation of Chargeable Gains Act 1992).
Disappearing gains
Arthur's furnished holiday letting activity of a single flat would not be regarded as a 'trade' within section 832(1), Taxes Act 1988, but as a Schedule A business, such that the branch or agency rules do not apply (section 10(2), Taxation of Chargeable Gains Act 1992). When Arthur sells the Brighton property, any gain is not chargeable to capital gains tax if he is not resident or ordinarily resident in the tax year of disposal (section 2(1), Taxation of Chargeable Gains Act 1992). In addition, there is no provision to claw back the rolled over gain from The Winchester in these circumstances. Arthur's accountant advised that the provisions of section 10A, Taxation of Chargeable Gains Act 1992 (taxing gains of temporary non residents) were not applicable because Arthur's disposal of the Winchester arose when he was United Kingdom tax resident. Furthermore, the acquisition of the Brighton property took place after he ceased to be resident and also was not caught. Hence Arthur could resume residence within a five-year period, so long as he disposed of his Brighton property before returning. Arthur poured a glass of his favourite tipple and treated himself to an expensive cigar. After all, he felt a lot happier in Canada now that he could return to the United Kingdom when occasionally feeling homesick. He could sell the Brighton property in due course without worrying about the rolled-over gain from The Winchester. Arthur was so ecstatic, he even considered paying his long-suffering accountant's fees - briefly.
