IFM25013 - Real Estate Investment Trust : Capital gains: computational rules: dual use assets: examples
The first example shows how the rules for attributing base costs etc work where a property asset that is not easily severable into separate parts has had dual usage. The second example is where the property has discrete parts. See IFM25010 for guidance.
Example 1
Company C joins the regime on 1 January 2012. At that time C owns a single storey office building which is divided into three similar units with a communal reception and car park (of roughly the same floor area as the building). The property is rented to F Ltd.
On 1 January 2015, F vacates and C Ltd uses the property as a regional office for both its property rental and residual businesses. One third of the use of the property can reasonably be attributed to the residual business.
C sells the property on 1 January 2018.
When C sells the property one sixth of the gain will be chargeable to tax. This is because the property was used 1/3rd for residual business activities for half the time, 3 out of the 6 years, it was held by the REIT.
Alternative scenario
If, instead, at 1 January 2015, C had a licence that allowed it to use only the car park at weekends (104 days per year).
The gain would be chargeable to tax based on a value attributable to the use of the property on a just apportionment basis.
The total use of the property for residual business was 25% of the property used for 2/7ths of half the period held, 14.25% of the gain would be chargeable. Although there is a de minimis rule for use of less than 12 months, it does not exclude from ‘temporal’ apportionment the first 12 months of other use.
Example 2
Company D joins the regime on 1 January 2015. At that time D owns a freehold office site, divided into four equal wings. The property is rented to G Ltd. On 1 June 2017, G surrenders one wing back to D Ltd for use as a regional office for both its property rental and residual businesses.
If the use for residual business is expected to be permanent, then this change of use would be treated as a transfer of part of the freehold site to the residual business of D. This would give rise to a capital gain in the hands of the property rental business of D at the date of the change of use. This disposal would be at market value and the gain would not be a chargeable gain.
If the arrangement is temporary, or part of a more flexible pattern of use of the office site, the change of use would be reflected in the division of any gain on disposal of the property by D, as in example 1 above.