TT3: Cut the Tax on Your Investments

In Issue N0.2 of Topical Tips we explained how Business Asset Taper Relief can mean that substantial gains realised on the disposal of businesses can attract an effective tax rate of only 10% if the asset is owned for a relatively short qualifying period (currently four years- but see below).

Interestingly there is a quirk in the rules concerning what is and what is not a Business Asset for Taper Relief purposes.

Following changes that were made by the Finance Act 2000, the term now includes a property used for the purposes of a trade carried on by certain companies. A company qualifies if it is a trading company and it is unlisted.

There is no longer any requirement that the owner of the property should have any connection with the qualifying company i.e. the property owner does not have to own shares or work for the company.

A capital gain, and rent too
Vitally, Taper Relief is not poisoned by the receipt of rent. If an individual owns a portfolio of investment properties that are let to unlisted trading companies, they will qualify as Business Assets for Taper Relief purposes. The result is that the rate of tax on gains made on their disposal could be just 10%.

A recent announcement by the Chancellor has made the position even more attractive. He intends to reduce the qualifying period for maximum Business Asset Taper Relief from four years to just two years, so it will soon be possible to buy an appropriate investment property and make a very short- term gain on it that will only be taxed at 10%.

It is important to understand that Taper Relief is basically only available to individuals and certain trusts – not companies. Gains made by property investment companies continue to attract indexation allowance and are charged at the appropriate rate of corporation tax without any Tapering.

Barnes Roffe Topical Tips

  • Consider whether a property investment would be appropriate for you.
  • Arrange matters so that tenants are unlisted trading companies.
  • Remember that many large companies are “unlisted” because this includes companies quoted on AIM and OFFEX.
  • Keep detailed records of each tenant of a property because the calculations in respect of “mixed” assets can be quite complex.
  • Investments via a property investment company will generally not qualify.
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