Exchanges of property interests: Yes - but no - but yes!

Ken Moody looks at the capital gains tax relief for exchanges of interests in jointly-held properties. 

I sometimes find myself scratching my head over the capital gains tax (CGT) relief for exchanges of interests in jointly held properties, which is not for the faint-hearted; patience and a careful analysis of the legislation are key. 

The relevant legislation (TCGA 1992, s 248A) provides for a form of roll-over relief where the joint owners of two or more properties exchange interests so that each owns 100% of one or more of the properties. See HMRC’s Capital Gains manual at CG73000 for examples, although in practice I find the legislation easier to work through (just!) 

The calculation of the relief is given by section 248B, which provides for two situations. 

(1) If the consideration received for the disposal of the relinquished interest is equal to or less than the consideration given for the acquired interest: 

(a) the disposal is treated as being on a 'no gain/no loss’ basis; and 

(b) the value of the consideration given for the acquired interest is reduced by the excess of the value of consideration received for the relinquished interest over the value which results from (a). 

(2) If the consideration for the disposal of the relinquished interest exceeds the value of the acquired interest, if the excess is less than the gain on disposal of the relinquished interest: 

(c) the gain on disposal is reduced to the amount of ‘unexpended consideration’ and 

(d) the consideration for the acquired interest is reduced by the amount by which the gain is reduced. 

Example: Swapping property interests  

John and Barry own two properties as joint tenants but are otherwise unconnected. They exchange interests so that property A becomes owned by John, and property B is owned by Barry.  

John 

The consideration that John receives for his relinquished interest in B is £150,000 (i.e., the value of the half share which he acquires in A). However, the consideration that John gives for his acquired interest is his half share in B worth £175,000, so the first of the above situations applies. 

The consideration received of £150,000 is reduced by £32,500 to £117,500, being half the cost of B, to achieve a no gain/no loss position. The cost of John’s acquired interest in A is calculated as follows: 

John’s cost of property A carried forward is therefore: £97,500 (£195,000 x 50%) + £142,500 = £240,000. 

Barry 

In Barry’s case, the second of the above situations applies. The value of the consideration received for the relinquished interest in A is £175,000 (i.e., the value of the half share acquired in B). The value of the consideration given is £150,000 (i.e., the value of Barry’s half share in A). The excess of £25,000 is referred to as the ‘unexpended consideration’, which is less than the gain accruing on the disposal of a half share in A of £175,000 - £97,500 = £77,500.  

The gain accruing is reduced by £52,500 to the amount of the unexpended consideration. The value of the consideration given for the acquired interest of £150,000 (Barry’s half share in A) is reduced by the same amount to £97,500.  

Barry’s base cost of Property B carried forward is therefore: £117,500 (£235,000 x 50%) + £97,500 = £215,000. 

If Barry were to make an equalisation payment of £25,000, this would obviously increase the consideration given for the relinquished interest in B to £175,000, which would reduce John’s cost of property A and increase Barry’s cost of property B to £240,000 (i.e., vice versa) and eliminate the chargeable gain.  

Practical tip 

The relief only works where each joint owner acquires 100% of one or more of the jointly-owned properties; so an application for informal clearance, where two of four joint owners of three restaurants wished to continue to jointly own one of the restaurants, was unfortunately unsuccessful.