The complexities of exchanging interests in land or properties

Scenario one: Unconnected parties 

Suppose you and Joe Bloggs (who is not considered a connected person) each own 50% of the following properties:

You both also each have base costs of £75,000 and £100,000 respectively, being 50% of the total costs. You wish to exchange your 50% shares with each other to each solely own one of the properties. You exchange your 50% share of the flat in London for sole ownership of the house in Cornwall.

Ignoring any discounts for part ownership (which may apply in practice), you would be deemed to receive disposal proceeds of £180,000 (being the value of a 50% share of the house in Cornwall) which, after deducting your 50% share of the cost of the flat in London (being £75,000), gives a total gain of £105,000. 

As you would be receiving a share more valuable than the share you are disposing of, you would have an immediately chargeable gain of this difference, being £10,000. The other £95,000 of the gain would be available for rollover relief. Assuming rollover relief is claimed, your base cost of the house in Cornwall going forward would be £175,000, calculated as follows:

• Your original base cost for 50% of the Cornish property of £100,000, plus
• The market value of the 50% of the London property being disposed of, i.e. £340,000/2 = £170,000, minus
• The rollover relief claimed on the exchange i.e. £95,000.

It should be noted that a claim for rollover relief to apply must be made within four years of the end of the tax year in which the exchange takes place. For example, if the exchange happens in May 2023, a claim must be made no later than 5 April 2028.

A claim for rollover relief is not available if the interest acquired is your principal private residence, as any gain will be covered by principal private residence relief. Furthermore, any rollover relief claimed will be clawed back if the property becomes your principal private residence within six years of the exchange.

Alternatively, suppose you are disposing of your 50% share of the house in Cornwall for sole ownership of the flat in London. You would be deemed to receive disposal proceeds of £170,000, which gives a gain of £70,000 after deducting your base cost of £100,000 of the house in Cornwall. The full gain of £70,000 would be eligible for rollover relief as you are receiving a share less valuable than the share you are forfeiting. If a claim for rollover relief is made, the base cost of the flat in London going forward would be £185,000, calculated as follows:

• Your original base cost for 50% of the London property of £75,000, plus
• The market value of the 50% of the Cornish property being disposed of, i.e. £360,000/2 = £180,000, minus
• The rollover relief claimed on the exchange i.e. £70,000.

If you, or the other party, provide consideration to make the exchanges be of equal value, then no gain will be immediately chargeable and full rollover relief will be available for both parties. In the above example, this would require the party disposing of a 50% share of the flat in London to pay a further £10,000 to the other individual. 

Scenario two: Connected parties

Broadly speaking, you’re connected to your spouse or civil partner and their relatives, your relatives and their spouses, a company you control, and fellow business partners and their spouse and relatives. If you’re a settlor of a trust, you’re also connected to the trustees of that settlement.

If you and the other party are connected persons then the disposal of your interest is equal to the current market value of the interest you are disposing of, as opposed to what you are receiving. This effectively reverses the treatment in scenario one, and the immediately chargeable gain will now fall upon the individual disposing of the more valuable interest. 

To demonstrate this, suppose in the above example you and Joe Bloggs are connected persons. If you were to dispose of a 50% share in the London flat for sole ownership of the house in Cornwall, your deemed disposal proceeds would be £170,000, being the market value of the share you are disposing of. This would give a gain of £95,000 which is fully eligible for rollover relief. If claimed, this would give a base cost of the house in Cornwall of £185,000, with no immediate charge to Capital Gains Tax (CGT).

If you were to dispose of a 50% share of the house in Cornwall for sole ownership of the flat in London, your deemed disposal proceeds would be £180,000 giving a gain of £80,000. In this scenario, the deemed disposal proceeds of £180,000 are more than the deemed acquisition cost of the 50% share of the flat in London, being £170,000, meaning £10,000 is not eligible for rollover relief and is immediately chargeable to CGT. The remaining £70,000 is eligible for rollover relief, and if claimed gives a base cost of the flat in London of £175,000.

Regardless of a claim for rollover relief, a UK land return will need to be completed detailing the disposal within 60 days of the completion of the exchange unless you are exchanging interests in land with your spouse. 

Any additional consideration paid to equalise the value of the disposals will have no effect on the CGT position if you are exchanging with a connected persons (as the transaction is deemed to take place at market value) but may instead lead to Inheritance Tax implications.

Inheritance Tax (IHT)

Any additional consideration paid in respect of a land exchange will be treated for IHT tax purposes as a gift to the individual receiving the consideration. This will be classed as a Potentially Exempt Transfer (PET) for IHT purposes and should therefore only be chargeable if the donor were to die within seven years of the exchange (subject to the availability of any reliefs/exemptions e.g. the current nil rate band of £325,000).   

Furthermore, if more than three years pass from the date of the PET to the death of the donor, then taper relief is available to reduce the IHT liability falling on the recipient. Taper relief reduces the IHT due by 20% for each year over three years the donor lives after making the PET. After seven years, the transfer is wholly exempt from IHT.  

Stamp Duty Land Tax (SDLT) 

Given the above, consideration is being ‘paid’ for the interest you are receiving, being the value of the interest you are forfeiting. As consideration is being provided for an interest in land, this could trigger a charge to SDLT if the value of the land/property is above the SDLT thresholds.

The implications are dependent on whether the exchange is of equal value, the type of interest being given (i.e. freehold or leasehold), the total value of the consideration and other factors. SDLT is therefore clearly an additional consideration which should not be overlooked when exchanging interests in land. 

What should you do?

If you are looking to exchange interests in land, while you may not be in receipt of any cash proceeds, you should consider in advance of the transaction whether any tax charge will arise and, if so, make plans to meet the liability. The availability of rollover relief, IHT and Stamp Duty are also all key factors that need to be addressed before you exchange am interest in land with a connected or unconnected party.   

For professional advice on the above, whether it be a more detailed calculation of any chargeable gains and rollover relief, what constitutes an exchange between connected persons, or additional detail on any IHT and SDLT implications, please fill in the form below and one of our experts will be in touch to discuss your requirements and how we can help