Private sector landlords may think twice before letting properties to partnerships and quoted companies because changes in the Finance Bill will mean they will be served a huge additional tax bill if they do so.
Tax experts are warning that changes to capital gains tax announced in last month’s Budget will effectively give individual landlords letting commercial property a 15% tax discount when they come to sell the assets if they have been letting the premises to unquoted trading companies.
Chancellor Gordon Brown used last month’s Budget to cut CGT to what he described as its lowest-ever level for long-term investors. The changes mean that the effective top rate of CGT for individuals on business assets can be as low as 10% where those assets have been owned for four years and necessary conditions met. The rate on non-business assets reduces to 25% after ten years ownership.
The Revenue has been told the changes will cause chaos and could see many landlords put pressure on tenants to change the way they do business.
Officials signalled this week they were prepared to reconsider. ‘The Finance Bill reflects the extension to the [business taper relief] rules and if this is a consequence of these changes then it is something we need to consider,’ a spokesman said.
Steve Collins, a partner with Devon-based firm Francis Clark, said the measures would mean properties let by individuals or trustees to unquoted trading companies may qualify as a business asset – even where the landlord has no financial or other connection with the company.
‘If the rules stay as they are drafted the chancellor will have given a remarkable boost to a particular part of the property sector,’ he said. ‘Did Gordon Brown really mean to slash the tax rate on property let to unquoted trading companies, but not on property let to quoted companies, partnerships or sole traders. Unless the Finance Bill is changed that’s what will happen.’
And he added: ‘We expect that some unincorporated businesses may have to be transferred to companies before they will be able to fined a landlord prepared to let property to them.’
The commercial property market is worth well in excess of £500bn and grew by around 14.5% last year. The changes will hit thousands of landlords and tenants outside of London, the South-East of England and major cities, where commercial properties tend to be held not by individuals but by large institutions.
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