GREIT05010 - Capital gains: computational rules: dual use assets

Gains on disposal of assets that have been used wholly and exclusively for the purposes of the tax-exempt business throughout their period of ownership are exempt from tax (section 124(1)(a) FA 2006). There are extensions to this rule to deal with assets that have been used other than wholly and exclusively for tax-exempt purposes.

De minimis exemption

Where an asset has been used partly for the purposes of the tax-exempt business and partly for other purposes, there is a de minimis rule that allows the period of non tax-exempt business use to be disregarded (section 124(1)(b) FA 2006).

The rule is that if the periods of other use amount to less than a year, any gain on disposal will not be chargeable to tax. To decide if the condition is met, all periods of other 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 three months until a new tenant, T2, moves in in May 2010. T2 vacates P in May 2012, and again, C uses P for administration until a third tenant, T3, moves in November 2012. C sells P in December 2012.

Here the entire gain on disposal will be tax-exempt since the aggregate of periods of other use is nine months. The six-month period of other use before joining the regime is ignored.

Other use amounting to 12 months or more

Where an asset has been used partly for tax-exempt business and partly for other purposes, and the 12 month de minimis exemption does not apply, part of the gain on disposal is not chargeable to tax (section 124(2) FA 2006).

To determine the portion that is exempt, account should be taken of

• the extent to which the asset is used for the tax-exempt business, and
• the length of time during which the asset is used for the different purposes.

If the periods of other use are greater than or equal to 12 months, the whole period of other use is taken into account in apportioning the gain.

Section 124(2) FA 2006 talks about ‘reasonable’ attribution, having regard to actual use. In arriving at the extent to which property is used for non-exempt 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 of another. The appropriate indicator for assets other than land that are used, in part, for the tax exempt business will depend on the nature of the asset and the business arrangements.

For an example of attribution see GREIT05013.