13th Aug 2024
522
Property holding company bought and immediately sold a property to an investor - taxable gain?
Didn't find your answer?
Industry insights
Kefron
What AI Can and Can’t do with Invoices in 2024
Sage Accountants
Should your client incorporate? The pros and cons
Kefron
How is Automation Redefining the Role of AP?
View more
Latest Any Answers
-
Under / Over Tax Payment Scenario Resolution
-
Bank for UK Company with non-UK Owners/Directors
-
Capital Loss from a previous period not reported
A client has, as is usual, come to us after the event.
Briefly, they have a property holding company which holds freeholds used by an associated trading company (separated for risk management purposes and MV rent is paid).
As a form of financing, they bought and immediately sold a property to an investor, who then granted a lease <25yrs to the associated (not group) trading company. On the face of it, we have a large gain in the holding company, no group relief opportunity and a trading company that will benefit from the tax deduction of the rentals paid at OMV, but already has losses b/f so little benefit.
CG70774 refers to bringing in the value of the lease itself as a form of consideration, but as the lease is being granted to a different company, presumably not at point - though I wonder if there is an issue with HMRC viewing the grant of the lease to the associated company as a form of distribution from the property holding company - even if common control.
I have also had it suggested to me that the difference between purchase and resale price could be treated as loan finance or similar, but in the absence of explicit contract wording to support this, it just looks to me like we have a large chargeable gain in one company and a future tax benefit on the trading company in the form of a lease.
Am I missing anything? At the moment I have a CT600 reporting a chargeable gain and a client who is going to faint...
Save content
Tags
- Alternative finance
- Corporation tax
- Lease accounting
Related resources
Guide
Sponsored
Audit challenges and the role of technology
Guide
Sponsored
VAT Reverse Charge – A guide for accountants
Guide
Sponsored
Getting your technology ready for the future
Replies (12)
Please login or register to join the discussion.
By runningmate
13th Aug 2024 16:05
Would your best route be to say to the client, "Let's get some specialist advice to ensure we minimise any tax problems" - and then get that advice?
RM
Thanks (1)
Replying to runningmate:
By norstar
13th Aug 2024 16:24
I'm not sure you read the first line "A client has, as is usual, come to us after the event".
I have however discussed with my external consultant (unsure themselves) and was hoping to see if anyone else had come across something similar and had input.
Thanks (0)
By DJKL
13th Aug 2024 16:07
How connected is the investor?
Thanks (0)
Replying to DJKL:
By norstar
13th Aug 2024 16:21
I should have said - unconnected. It's an external independent investor (specialist finance company) who is making a good margin on the rental income.
Thanks (0)
By David Ex
13th Aug 2024 16:44
norstar wrote:
… they bought and immediately sold a property to an investor, …. On the face of it, we have a large gain in the holding company ….
“Daft laddie” question. Why isn’t that a trading profit?
Thanks (0)
Replying to David Ex:
By norstar
13th Aug 2024 17:07
True, I suppose they haven't entered into the transaction on that basis - it's an investment asset but which they sold for finance reasons, rather than to realise a profit on uplift of property development. But this doesn't affect the tax position no? Trading profit=tax, chargeable gain=tax.
Thanks (0)
Replying to norstar:
By Ruddles
13th Aug 2024 17:12
All things being equal, the distinction for tax purposes may well be academic.
But, buying a property and selling it immediately afterwards doesn't sound much like investment activity to me. But we probably don't have all the facts - perhaps they did buy it as an investment but someone made them an offer they couldn't refuse. Who knows? Presumably the client does.
Thanks (0)
Replying to norstar:
By David Ex
13th Aug 2024 17:23
norstar wrote:
True, I suppose they haven't entered into the transaction on that basis - it's an investment asset but which they sold for finance reasons, rather than to realise a profit on uplift of property development. But this doesn't affect the tax position no? Trading profit=tax, chargeable gain=tax.
Well outside my (small) sphere of competence but I imagined that the prospects (if there are any) of any tax deferral would be far less if the transaction is regarded as trading.
Thanks (0)
Replying to David Ex:
By Ruddles
13th Aug 2024 17:10
Agreed - certainly doesn't sound like capital to me. But well done for being able to immediately turn a large profit.
Thanks (0)
Replying to Ruddles:
By DJKL
13th Aug 2024 17:24
Before I started with my current employers they entered into a contract to buy a church and then entered into another contract to sell it, both settling same day, whilst profit was only about 10% it was a pretty good deal with no cash really outlayed.
Thanks (0)
Replying to Ruddles:
By norstar
13th Aug 2024 17:25
It's a large gain in the property company yes, but that gain is then loaned to the trading company for the purpose of it fitting out the property for its business. They are in turn saddled with a lease and rental commitment. It suits the investor who pay an excess over MV but then realise rental income over the next X years with a good margin. It suits the client who then obtains a form of finance to fit out the property without resorting to bank finance. Trouble is, there doesn't appear to have been any thought given to tax at the time!
Thanks (0)
Replying to norstar:
By FactChecker
13th Aug 2024 17:58
"Trouble is, there doesn't appear to have been any thought given to tax at the time!"
Guess it makes a change from those who appear to only plan transactions on the basis of minimising (or ideally avoiding) tax, even when this is to the detriment of other factors (including profit).
But there can of course be a happy medium IF they talk to you first!
Thanks (1)
