HMRC has launched a consultation ‘Tax Simplification for Alternative Finance’. This explores proposals to address the difference in Capital Gains Tax (CGT) treatment when property is refinanced using alternative, rather than conventional, finance methods.
Background
Alternative finance arrangements are a method of raising finance that typically involves the sale, purchase and renting of assets in circumstances where conventional financing would involve lending with the payment or receipt of interest.
When using conventional finance arrangements, an individual refinancing a property that they own, using it as collateral, is not making a disposal for Capital Gains Tax purposes. Similarly, such refinancing is not a Disposal event for capital allowance purposes.
A common method of alternative finance for property is Diminishing Shared Ownership (DSO) arrangements.
Where an individual wishes to refinance using DSO arrangements, they would typically sell an interest in the property to a financial institution, who would then advance the finance required.
This transaction will represent a Disposal for Capital Gains Tax purposes, potentially resulting in tax being payable, unless a relief such as Private Residence Relief (PRR) for Residential property applies. In addition, a disposal event for capital allowance purposes could arise on the refinancing where Plant and machinery allowances or the Structures and Buildings Allowance have been claimed. Future capital allowances may also be reduced.
It is these tax disparities between conventional and alternative refinance arrangements that the consultation seeks to address in its proposals.
Consultation proposals
For alternative finance arrangements, the consultation proposes that where certain conditions are met, for Capital Gains Tax purposes, the person obtaining the finance (P) would treated as having owned the interest in property throughout the period of the arrangements, and neither P nor the financial institution are treated as having made any disposal or acquisition.
It is proposed that for a refinancing arrangement to be exempt from a Capital Gains Tax charge in this manner, the arrangement must include:
A transfer of an interest in land from P to the financial institution.
A leaseback of the interest from the financial institution to P.
A set period of time for the arrangement, for example, 25 years.
An agreement that, at or before the end of the lease, the whole of the interest in land is returned to P by the financial institution, either in tranches over the life of the arrangement or following one final payment.
The consultation notes that consideration must be given to what happens in the case of default, and how agreements should be monitored should a default occur.
In addition, robust anti-avoidance rules will be required to prevent arrangements seeking to exploit the rules.
From a capital allowance perspective, views and evidence are sought as to whether issues around disposal events and/or the loss of future allowances arise in practice and cause issues, or act as a barrier, when refinancing.
If it is found that changes for capital allowance purposes are necessary, the proposal would be to adopt a solution for alternative refinancing arrangements that is similar to the proposal for Capital Gains Tax.
The consultation closes at 11:59 pm on 9 April 2024. Responses can be sent by email.
Capital Gains Tax Simplification Consultation
HMRC has launched a consultation ‘Tax Simplification for Alternative Finance’. This explores proposals to address the difference in Capital Gains Tax (CGT) treatment when property is refinanced using alternative, rather than conventional, finance methods.
Background
Alternative finance arrangements are a method of raising finance that typically involves the sale, purchase and renting of assets in circumstances where conventional financing would involve lending with the payment or receipt of interest.
When using conventional finance arrangements, an individual refinancing a property that they own, using it as collateral, is not making a disposal for Capital Gains Tax purposes. Similarly, such refinancing is not a Disposal event for capital allowance purposes.
A common method of alternative finance for property is Diminishing Shared Ownership (DSO) arrangements.
Where an individual wishes to refinance using DSO arrangements, they would typically sell an interest in the property to a financial institution, who would then advance the finance required.
This transaction will represent a Disposal for Capital Gains Tax purposes, potentially resulting in tax being payable, unless a relief such as Private Residence Relief (PRR) for Residential property applies. In addition, a disposal event for capital allowance purposes could arise on the refinancing where Plant and machinery allowances or the Structures and Buildings Allowance have been claimed. Future capital allowances may also be reduced.
It is these tax disparities between conventional and alternative refinance arrangements that the consultation seeks to address in its proposals.
Consultation proposals
For alternative finance arrangements, the consultation proposes that where certain conditions are met, for Capital Gains Tax purposes, the person obtaining the finance (P) would treated as having owned the interest in property throughout the period of the arrangements, and neither P nor the financial institution are treated as having made any disposal or acquisition.
It is proposed that for a refinancing arrangement to be exempt from a Capital Gains Tax charge in this manner, the arrangement must include:
The consultation notes that consideration must be given to what happens in the case of default, and how agreements should be monitored should a default occur.
In addition, robust anti-avoidance rules will be required to prevent arrangements seeking to exploit the rules.
From a capital allowance perspective, views and evidence are sought as to whether issues around disposal events and/or the loss of future allowances arise in practice and cause issues, or act as a barrier, when refinancing.
If it is found that changes for capital allowance purposes are necessary, the proposal would be to adopt a solution for alternative refinancing arrangements that is similar to the proposal for Capital Gains Tax.
The consultation closes at 11:59 pm on 9 April 2024. Responses can be sent by email.
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