Few tax options on office sale

RA writes: Thirty years ago I personally purchased a building which was leased to my company. In 2005, the company moved to larger premises and the property was put up for sale. It did not sell until last year when I found a tenant who also took an option to buy the building. A year later, they have decided to exercise the option and will buy the property for around £2 million.

I have been informed that the profit on the sale will be subject to 28% capital gains tax (CGT), even though it was a business asset for 25 of the 30 years that I owned it. I cannot see why it should lose its business asset status just because it did not sell immediately. Is this correct?

As you are selling the asset personally, the rate of CGT is 28% for higher-rate taxpayers if the asset is sold after 22 June 2010, writes Jon Sutcliffe, partner at Kingston Smith LLP.

On the sale of an asset by an individual, if the appropriate conditions are satisfied, a claim for Entrepreneur’s Relief can be made. This relief reduces the effective rate of CGT down to 10% on the first £5 million of gains made in an individual’s lifetime. However, for this relief to apply, the disposal must be a ‘material disposal of a business asset’. The term ‘business asset’ includes the whole or part of a business, an asset used in the business at the time the business ceases, or the shares of a business. Unfortunately, this relief will only apply to your disposal of the property where the property is sold at the same time as your sale or cessation of the business.

In 2009 you granted the eventual buyer an option to purchase your property. The grant of the option is in fact a disposal for CGT purposes, so if you received anything to grant the option, it will be subject to CGT at 18%, less the annual exemption.

To calculate your capital gain on the buyer’s exercise of the option, you take the sale proceeds plus the proceeds received on the grant of the option in 2009, if any. From this you deduct any sale costs (e.g. legal fees), the original cost (re-valued at its market value in March 1982), and the costs of any subsequent enhancements to the property. You can then deduct the annual exemption, which is £10,100 for 2010/11, and the net amount is subject to CGT at 28%. Your tax bill is reduced by any tax that was paid on the grant of the option in 2009.