What Is It?

A diminishing shared ownership agreement is also a means of purchasing an asset without the use of a loan, but in this case ownership of the asset will only pass to the purchaser in stages, not at the commencement of the agreement.

Such an agreement normally involves the intending purchaser acquiring a fractional share of the asset, with the remainder acquired by a financial institution. The purchaser will pay rent in respect of the share not owned and over time will acquire all of the remaining share.

Shared ownership arrangements that are alternative finance arrangements

The capital gains tax rules relating to alternative finance arrangements apply to shared ownership arrangements that satisfy the conditions below:

A financial institution regulated home purchase plan provider (the first owner) acquires a beneficial interest in an asset (or, from 24 May 2022, the interest is acquired under regulated electronic system facilitated arrangements:

1. another person (the eventual owner) also acquires a beneficial interest in it;
2. the eventual owner makes payments to the original owner that equal the consideration paid by the first owner for their interest and as a result acquires that interest (which may or may not be acquired in stages);
3. the eventual owner also makes other payments to the original owner; and
4. the eventual owner has the exclusive right to occupy or use the asset and is exclusively entitled to any income, profit or gains arising from it, including in particular any increase in value.

Tax Treatment

If, under diminishing shared ownership arrangements, an asset is sold by one party to the arrangements to the other party, the alternative finance return is excluded in determining the sale and purchase price for capital gains tax purposes. (As the original purchaser must be a financial institution and therefore likely to be within the loan relationship rules, the capital gains tax rules are more likely to affect the original owner, whose base cost for the purposes of future disposals will consequently not include the alternative finance return).

For the purposes of diminishing shared ownership arrangements, the alternative finance return is a payment by the eventual owner that is not a payment in respect of the consideration given by the original owner to acquire their beneficial interest in the asset nor an arrangement fee or legal or other expense that has to be paid under the arrangements.

If you have a question about Diminishing Shared Ownership – speak to the Robinsons Team