My client has a motorcycle shop, which he has rented out for many years. He now wishes to convert the property into flats and sell. Capital gains tax will arise on this transaction - but at commercial property rates, residential property or a bit of both?

Arthur Weller replies:
From the question, it appears that your client actually has an investment property that the tenant has used as a motorcycle shop. Strictly speaking, if he develops this property into flats in order to sell, he has triggered a capital gain now because he has converted a fixed asset into trading stock (he has now become a property developer) (see HMRC’s Capital Gains manual at CG69200 ‘Appropriations to stock in trade’). This capital gain will be taxed at non-residential capital gains tax rates (i.e. 10%/20%), because currently, the property is a shop. There is a possibility to defer this current capital gain until the flats are sold, by making an election – see HMRC’s guidance. When the flats are sold the ‘profit/gain’ is a trading profit and will be subject to income tax. It needs careful consideration, depending on the figures involved, whether or not it is worth making the election.