There seems to be quite a lot of misunderstanding about the tax implications of property exchanges. Many people appear to have a mind block when it comes to treating an asset as consideration.
Giles owns a building worth £500,000 and Edward owns another building which he thinks is worth the same. They agree to swap each other’s buildings. Although it may seem fair that Giles and Edward should be able to carry on as if nothing has ever happened, this is not how things work from a tax perspective. Giles has disposed of a property for £500,000 and so has Edward. Their capital gains will depend on their acquisition costs (as usual). Furthermore, if the property was residential then there would be a 60 day reporting and payment requirement in addition to normal tax return obligations. SDLT would also be payable 14 days after the date of the transaction.
Although there are no reliefs for straightforward swaps, there can be reliefs for partitions.
Capital gains tax relief for partitions
Assume that the above example is changed (to example 2) and so that Giles and Edward each hold the buildings jointly and then each exchanges his 50% share of one building with the other to leave each individual as the sole owner of one of the buildings. In this case the analysis is different. Here there would be no capital gains tax and Giles and Edward would hold each building with the original tax base cost that they had acquired the joint interests at. Effectively any capital gains tax liability is deferred. These rules are quite prescriptive and only work when all parties to the transaction end up owning their own piece of land or building outright. For example no relief could be obtained in the following case (example 3):
1. Two buildings (Building one and building two) are owned by A, B and C in the proportions of 50%:25%:25%.
2. A disposes of 50% of building 1 to B and C in exchange for 50% of building 2.
3. Therefore, the end result is that A owns 100% of one building and B and C each own 50% of the other building.
Here, there is no ‘partition relief’ for capital gains tax purposes because neither B or C end up as sole owners of a piece of land (or the building).
SDLT relief for partitions
The SDLT relief for partitions is somewhat friendlier than the capital gains tax relief. Here the rules simply say that “in the case of a land transaction giving effect to a partition or division of a chargeable interest to which persons are jointly entitled the share of the interest held by the purchaser immediately before the partition or division does not count as chargeable consideration”.
This clearly means that there would have been no SDLT in example 2, because any consideration comprising the joint interests do not count as consideration which is chargeable to SDLT. Arguably, the relief would also apply to example 3 on the basis that the land transaction gives rise to one building being 100% owned by A. As there is no statutory definition of a partition for SDLT purposes then this position may be open to attack from HMRC.
Forbes Dawson view
The main message here is to check the capital gains tax and SDLT impacts of property exchanges. The default position will be that both capital gains tax and SDLT will apply, but in partitions reliefs may be available. Even then you may end up disappointed by the strictness of the capital gains tax rules although SDLT rules may provide more latitude. In some cases there may be opportunities to structure certain transactions more tax efficiently if timely advice can be taken. Here I am thinking that it may be possible for some co-owners to end up owning a specific leasehold interest over part of a property rather than a joint interest (thus falling within the conditions for capital gains tax relief).
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