RSS feedsMy client bought premises in January 2005 to convert into a Japanese restaurant. After six months of refurbishment, the restaurant officially opened in June. He has traded as a sole trader successfully since that date and has just been approached by a restaurant chain to acquire the restaurant. He is considering selling. Any sale should take place in February or March. He stands to make a gain of £500,000, which, according to my calculations, will give him a tax charge of £50,000. Is that the case?
From the figures you have supplied, it looks as if you have given full business asset taper relief (BATR) at 75% on the basis that the asset has been held for two years and it has been a business asset throughout that period. However, it is not as clear-cut as that. To qualify for BATR, the restaurant must have been used wholly or partly for the purposes of a trade carried on by your client. As the first six months were spent refurbishing the property, this was not trading. The restaurant only qualifies as a business asset for BATR purposes from the date the trade commenced. Therefore, only one-quarter of the ownership period qualifies for non-BATR. If the gain is £500,000, £125,000 of this gets no taper relief and £375,000 qualifies for BATR. The tax payable will therefore be £87,500. This is an effective tax rate of 17.5% – not the expected result. To qualify for full BATR on all the gain, ten years would have to pass from the date the trade commenced.
Had the restaurant been purchased using a new company and the shares were sold after two years, the shares would have qualified for full BATR. This is because the definition of a trading company looks at trading activities. Trading activities include ‘preparing to carry on a trade’ provided ‘the company starts to trade as soon as is practicable in the circumstances’ (Para 22A Sch A1 TCGA 1992). In this case, that test would have been met as the trade started immediately after the refurbishment. With the benefit of hindsight, your client could have saved £37,500 by using a different structure.
I think this case highlights the need to look very closely at what a client’s activity is going to be before deciding to keep assets in an unincorporated form. Since the introduction of taper relief, there has been a tendency to try to keep assets outside a company structure, which, as we have seen, does not always give the best results.
Also, had your client commenced the restaurant trade and then closed to refurbish, the refurbishment period would not have diluted his BATR position. As with all taper cases, caution should be taken to ensure the best results are achieved.
Paula Tallon is a tax director at Chiltern
