CGT on disposal of equitable interest

A B C and D own separate flats (which they rent out) in a single house. All have their own separate residences elsewhere so PPR does not apply. The council has ordered them to join the flats and restore the property to a single house as there was no planning permission to convert it to flats. Each flat is a different size with different value. Each flat has increased in value substantially since initial acquisition. CGT is an issue as the house is in central London.

They want to execute a declaration of trust specifying the share each will have in the eventual proceeds of sale. My client A has spoken with his accountant and asserts that no CGT issues arise until actual sale and that no CGT return is required until actual sale when money changes hands.

My view is that execution of the declaration will, of itself, be a disposal by each of them giving rise to CGT and that the disposals must be included in the CGT return for the year of the execution of the declaration. I guess roll over relief is available but only if claimed. Also I think each must have a separate solicitors to advise on the content of the declaration.

I would welcome any views.

Vincent Oakley

I think more information needs to be given as to how the legal and beneficial interests in the flats/house are currently held and if relevant the Freehold interest.

Paul Storrie
Storrie & Company

Can you explain more about A B C and D came to own their separate flats?
For example, did they, together, buy the freehold and then themselves separate the property into flats? Are the flats registered at the Land Registry under separate leasehold titles?
Or was the property already separated and they each bought their respective flats?
Who owns the freehold?

Paul Davidoff
New Quadrant Partners Ltd

It would be worth considering whether the CGT treatment under Jenkins v Brown might apply to allow the owners to pool their respective several interests now without triggering a taxable event, to then take a proportionate share of the sale proceeds on a subsequent disposal of the single property.

SDLT would also need to be considered.

Mike Westbrook
Partner - Thrings LLP

It transpires that A B C and D have been shopping round for the cheapest conveyancing quote. Another solicitor has agreed to sort it all out for £1,000 (£250 each) + VAT and assures them that it is simple. The property was subdivided into four flats before they purchased and have separate land registry title numbers (not sure if these are freehold or leasehold) and they are merging into a single freehold title. I have been uninstructed so this is of academic interest alone for me now. The fee quoted seems to bear no relation to the value of a single flat never mind the property as a whole!

Vincent Oakley

When they bought their respective flats, was this as a result of a grant by the freeholder or by assignment from another lessee? It is possible, although unlikely, that they bought a share in the freehold. I assume, by the way, that the property is in England or Wales. The situation might be different if it is in Scotland or Northern Ireland.

Whatever the history, it would seem that each of A, B, C and D are going to exchange whatever interest their flat represents for an interest in the freehold. I assume their respective undivided share therein would be in proportion to the values of their flats. S.248A & 248B TCGA 1992 should apply.

Ray Magill

I think ss248 A (and B) may well not apply. These sections are designed to assist with a partition (or exchange) by joint owners. Condition A requires an initial joint holding and Condition D requires the consequential transformation into sole holdings. The sections do not deal with the reverse arrangement whereby sole owners transfer a property into joint ownership.

It seems likely that that each of ABC and D own their respective flats solely. Either these are flying freeholds or leaseholds (with the reversion perhaps owned jointly). The necessary planning compliance seems to involve the building ceasing to be sub-divided into separate dwellings. I query whether that can be achieved for planning law purposes while retaining the current property ownership configuration. Whatever that is legally, on the facts it seems very likely to constitute 4 separate dwellings. It is not clear to me whether it is possible to own in law a separate distinctive part of a single dwelling.

I imagine the most logical step would be for the 4 to own the property (the entire freehold or the existing leaseholds or one new lease after surrender of those) as tenants in common which would surely meet the planning obligation. It may possible from a property law standpoint for occupants of a single dwelling to be licensed, with some degree of exclusivity, to occupy distinctive parts of it e.g. like lodgers do, but this tenure together with a co-owners’ agreement regulating their inter-relationship may not be acceptable to them.

The procedures required if one co-owner wished to sell would need to be covered in it and apparently this operation would cause a part disposal for CGT by all co-owners of the interest to be carved out for sale to the third party buyer, plus further part disposals among themselves if the sale proceeds were then to be channelled to just one of them. That could not be avoided by use of s248A either, because under Condition D all the joint owners must each become sole holders of part. Giving one owner sole ownership of part with joint ownership of the rest left undisturbed is not covered.

Indeed trying to sell part of a property which must be used as a single dwelling for planning law seems fraught with difficulty (as in pre-contract enquiries) whatever the basis of its then current ownership structure in property law. Unless its planning status can be altered it may be that the sale of the entire building will be the only feasible future sale route. It would then be extremely prudent to have a co-owners’ agreement dealing with that prospect plus all manner of other matters including the death of a co-owner. A transfer into joint ownership now plus CGT liability and then occupying as mere licensees may be less attractive than a sale now (or soon) to a third party to fund the tax.

Lay clients have a right to instruct someone who may be inappropriate. Just as they are entitled to make home-made and £50 Wills. But there is a silver lining. Inevitably, later on, multiple competent advisers to the all the various separate (and probably warring) parties will have to sort it all out. Kerching!

Jack Harper