When two or more people own land or property and decide to split the assets up into separate ownership there could be a capital gain. Ian Wright reveals that there is good news and that comes in the form of a little-known concession...
If two brothers both own four buy-to-let properties jointly and decide to own two each as sole owners then technically each brother is selling 50% and buying 50% of the properties. This would therefore result in a capital gain on half of the value of all the properties.
Good news! There is an extra statutory concession (known as ESC D26) which allows joint owners to exchange their joint interests without a charge to tax. This relief is similar to a type rollover relief under s 247 & s 248 TCGA 1992. This concession becomes law from 1 April 2010 (s 248A-E).
Types of Joint Ownership
You can split up various assets, such as a portfolio of let accommodation, or even split one asset into two, such as splitting a one hundred acre plot into two fifty acre plots. The concession is only allowed where, after the split, everyone ends up with sole ownership after the exchange.
Do They Have to be Business Assets?
The simple answer is no. The concession can apply to any jointly owned assets.
One of the main rules with regard to claiming ESC D26 is that in order to avoid a capital gain the split should be equal to the value of the assets relinquished. For example, if two people own two houses worth £400,000 but one house is worth £250,000 and the other is worth £150,000 then an exchange to own a house each will not avoid tax, and more to the point it is not very fair!
An equalisation payment of £50,000 will no doubt be required to make the exchange fair. The equalisation payment would therefore create a partial capital gain.
Interestingly, you do not have to own assets in equal portions to claim the concession; you just need to ensure that the resulting exchange is in proportion to the share of assets owned. For example, if two people jointly owned three properties all worth £100,000 each, and the percentage of ownership was 1/3 to 2/3 then an exchange giving the 2/3 owner two properties and the 1/3 owner one property would work.
Principal Private Residence (Your Home)
One particular restriction to the use of the concession is if the land in which the further interest is acquired is, or at any time has been or becomes, the only or main residence of the transferee.
The tax office will extend their concession to include principal private residences if as a result of the exchange each person becomes the sole owner of their respective home and the gain hypothetically arising on a sale immediately after the exchange would be wholly exempt.
The point of this hypothetical sale is to ensure that a capital gain would not arise due to property being exchanged in circumstances where full relief under the principal private residence relief rules are restricted such as not always having lived in the property or where part of a residence has been used exclusively for business.
Spouse and Civil Partners
Spouses or civil partners are in fact treated as one person (sole owning union) for the purposes of ESC D26.
Stamp Duty Land Tax (SDLT)
Technically, SDLT should be payable on an exchange however there is legislation under SDLT law which can permit partitions of land to be exempted from the tax (FA 2003 Sch 4 para 6).
You can read more about the concession at:
Even if assets are not split up equally the capital gains tax and SDLT liability should be lower when claiming ESC D26 and applying SDLT law.